Abstract

http://ssrn.com/abstract=2296992
 


 



Default Prediction Around the World: The Effect of Constraints on Pessimistic Trading


Mark G. Maffett


University of Chicago - Booth School of Business

Edward L. Owens


University of Rochester - Simon School of Business

Anand Srinivasan


National University of Singapore - Department of Finance

July 22, 2013

Simon School Working Paper No. FR 13-22

Abstract:     
Research examining cross-country differences in the ability of market participants to accurately assess a firm’s likelihood of default using publicly available sources of information is virtually non-existent. This paper examines one potential source of such variation, constraints on pessimistic trading (i.e., trades made in anticipation of future price declines). On average, predictive accuracy is significantly greater in countries where pessimistic trading is less constrained. This relation is further identified using time-series variation in restrictions on short selling and the introduction of put option trading. Consistent with trading constraints limiting the extent to which prices reflect publicly available default risk information, the direct incorporation of accounting information in the default prediction model leads to a larger improvement in accuracy where pessimistic trading is limited. Finally, although fewer constraints consistently lead to more accurate identification of actual defaults, during periods of heightened macroeconomic uncertainty, default prediction models in countries with fewer pessimistic trading constraints inaccurately classify a greater proportion of non-default observations.

Number of Pages in PDF File: 51

Keywords: default prediction, short selling constraints, financial reporting transparency

JEL Classification: G14, G15, G33, G38, M41

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Date posted: July 23, 2013  

Suggested Citation

Maffett, Mark G. and Owens, Edward L. and Srinivasan, Anand, Default Prediction Around the World: The Effect of Constraints on Pessimistic Trading (July 22, 2013). Simon School Working Paper No. FR 13-22. 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
University of Rochester - Simon School of Business ( email )
Rochester, NY 14627
United States
585-275-1079 (Phone)
Anand Srinivasan
National University of Singapore - Department of Finance ( email )
Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore
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