Abstract

http://ssrn.com/abstract=2296992
 


 



Pessimistic-Trading Frictions 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

January 29, 2016


Abstract:     
This paper examines how equity market frictions that restrict pessimistic trading affect a firm’s information environment. Specifically, we analyze how short-sale constraints affect the availability of negative firm-specific information. First, we document that the overall informativeness of equity-market-based predictors of a firm’s likelihood of default is lower where short selling is more constrained. This informational cost is driven primarily by a reduced ability to accurately identify defaulting firms in the presence of short-sale constraints. Our results also reveal a novel informational benefit of restrictions on pessimistic trading in that short-sale constraints actually improve the usefulness of equity prices in identifying non-defaulting firms. A firm’s accounting information significantly mitigates the informational cost of short-sale constraints, particularly where a country’s institutional infrastructure promotes transparent financial reporting. Second, using an exogenous shock to pessimistic-trading frictions, we document that short-sale constraints are associated with higher credit prices. This evidence suggests other sources of information, such as financial reporting, do not fully mitigate the effect of market frictions and that the net effect of constraining pessimistic trading is a reduction in the availability of negative firm-specific information.

Number of Pages in PDF File: 58

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: February 17, 2016

Suggested Citation

Maffett, Mark G. and Owens, Edward L. and Srinivasan, Anand, Pessimistic-Trading Frictions and the Information Environment: Evidence from Short-Sale Constraints and Default Prediction around the World (January 29, 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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