This article investigates the debatable topic whether the Credit Default Swaps (CDS) market is informed relative to the equity market. To do this, we examine the impact of CDS price changes on stock returns calculated by transaction prices respect to various trading periods. We find that the stock returns overreact to credit news during the trading hours and partially reverse after the market closing. The CDS predictive effect mainly concentrates on “hard-to-value stocks”. The reversal happens mainly because overconfident investors underestimate their signal precision errors of short-run distress risk. Limit-to-arbitrage such as stock illiquidity, short-sale constraint, funding liquidity constraint, and separate equilibrium hypothesis cannot fully explain our results. Further, the predictability links to a reduction on destabilization for hard-to-value stocks during the market turmoil. Overall, our evidence suggests that CDS informed traders step into hard-to-value stocks during times with good liquidity. 

JEL classification: G12.
Keywords: Credit Default Swaps, Stock Overreaction, Market Effciency.​