Abstract

http://ssrn.com/abstract=2296992
 


 



Pessimistic-Trading Restrictions and the Information Environment: Evidence from Short-Sale Constraints and Default Prediction around the World


Mark G. Maffett


University of Chicago - Booth School of Business

Edward L. Owens


Emory University - Department of Accounting

Anand Srinivasan


National University of Singapore - Department of Finance

August 24, 2016


Abstract:     
We examine how pessimistic-trading restrictions, such as short-sale constraints, affect firms’ information environments. Although prior research finds that such restrictions reduce equity price informativeness, other non-equity-market-based sources of information, such as firm’s financial statements, could offset this loss of information. We assess the availability of firm-specific information based on the accuracy of a public-information-based default prediction model. We find that, while short-sale constraints both decrease the usefulness of equity-market variables for predicting firm default and increase the usefulness of equity-market variables for predicting non-defaults, the net effect of pessimistic-trading restrictions is a reduction in the informativeness of equity-market-based default predictors. Accounting and other non-equity-market-based sources of information significantly mitigate this informational cost. However, using an exogenous shock, we document that short-sale constraints are associated with higher credit spreads, which suggests that the net effect of pessimistic-trading restrictions is a reduction in the availability of firm-specific information.

Number of Pages in PDF File: 63

Keywords: Short-sale constraints; Default prediction; Financial reporting transparency; Credit spreads

JEL Classification: G15, G33, G38, M41


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Date posted: July 23, 2013 ; Last revised: August 25, 2016

Suggested Citation

Maffett, Mark G. and Owens, Edward L. and Srinivasan, Anand, Pessimistic-Trading Restrictions and the Information Environment: Evidence from Short-Sale Constraints and Default Prediction around the World (August 24, 2016). Available at SSRN: http://ssrn.com/abstract=2296992 or http://dx.doi.org/10.2139/ssrn.2296992

Contact Information

Mark G. Maffett (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Chicago Booth School of Business Logo

Edward L. Owens
Emory University - Department of Accounting ( email )
Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322
United States
Anand Srinivasan
National University of Singapore - Department of Finance ( email )
Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore
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