Abstract

http://ssrn.com/abstract=2296992
 


 



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

Anand Srinivasan


National University of Singapore - Department of Finance

July 29, 2015


Abstract:     
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


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Date posted: July 23, 2013 ; Last revised: July 30, 2015

Suggested Citation

Maffett, Mark G. and Owens, Edward L. and Srinivasan, Anand, Short-Sale Constraints and the Information Environment: Evidence from Default Prediction around the World (July 29, 2015). 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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