Traditional asset pricing models postulate that high risk investments are usually associated with higher returns. However, this does not hold in the relationship between credit risk and return. There is a known credit risk-return puzzle, which highlights a negative relationship between credit risk and the stock market returns. The objective of this study is to assess the puzzling credit risk-return relationship of stocks; in particular, comparing the stock returns of high versus low credit risk firms, as measured by credit ratings from Standard and Poor s in Australia and Japan for a period from January 1990 to June 2012. Our results indicate that the credit risk-return puzzle exists in both Japan and Australia. However, it seems that the credit risk-return anomaly is explained by the downgrade announcements in the market and hence we conclude that downgrade announcements of a firm have a significant impact on the cross section of returns.