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
National University of Singapore - Department of Finance
March 6, 2015
We find that default prediction is less accurate in countries where short selling is more constrained. However, the number of solvent firms incorrectly classified as likely to default is also lower in these countries when economic uncertainty is high. Non-equity-market-based default predictors partially mitigate the observed loss in predictive accuracy of market-based predictors where short selling is more constrained. Short-sale constraints are associated with higher credit spreads, suggesting that the net effect of short-sale constraints is a decrease in the availability of default-risk-relevant information and less efficient resource allocation through credit markets.
Number of Pages in PDF File: 43
Keywords: default prediction, short selling constraints, financial reporting transparency
JEL Classification: G14, G15, G33, G38, M41
Date posted: July 23, 2013 ; Last revised: March 7, 2015
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