Short-Sale Constraints and the Information Environment: Evidence from Default Prediction around the World
Mark G. Maffett
University of Chicago - Booth School of Business
Edward L. Owens
Emory University - Department of Accounting
National University of Singapore - Department of Finance
July 29, 2015
This paper examines how short-sale constraints affect a firm’s information environment. We assess the availability of firm-specific information based on the accuracy of an empirical estimate of a firm’s likelihood of default. Using a reduced-form default prediction model that includes only equity-market-based predictors, we find evidence of both an informational cost and benefit of short-sale constraints. Where short selling is more constrained, predictive accuracy is lower for defaulting firms but is higher for non-defaulting firms. The consideration of accounting information significantly mitigates the informational cost of short-sale constraints in identifying defaulting firms as well as the informational cost of actively-practiced short selling in identifying non-defaulting firms. Examination of a shock to short-sale constraints indicates that constraining short selling leads to higher credit spreads, suggesting that the net effect of short-sale constraints is a reduction in the availability of default-risk-relevant information.
Number of Pages in PDF File: 56
Keywords: Short-sale constraints; Default prediction; Financial reporting transparency; Credit spreads
JEL Classification: G15, G33, G38, M41
Date posted: July 23, 2013 ; Last revised: July 30, 2015
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