Are Short Sellers Informed? Evidence from the Bond Market
York University - Schulich School of Business
Virginia Polytechnic Institute & State University
Andrew (Jianzhong) Zhang
University of Nevada, Las Vegas - Department of Finance
June 11, 2012
Accounting Review, Forthcoming
We examine whether short sellers in the equity market provide valuable information to investors in the bond market. Using a sample of publicly traded bond data covering the period from 1988 to 2011, we find that firms with high short interest have lower credit ratings and are more likely to have their ratings downgraded. We also find that firms with highly shorted stocks are associated with higher bond yield spreads (about 24 basis points). Evidence of causality from short interest spikes and a natural experiment based on the SEC’s Regulation SHO pilot program confirms our findings. Overall, our results suggest that equity short sellers provide predictive information to creditors in the bond market.
Number of Pages in PDF File: 48
Keywords: short interest, credit ratings, bond yield spreads, financial reporting
JEL Classification: G12, G14
Date posted: June 11, 2012 ; Last revised: September 27, 2012
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