The Effect of Short-Sale Constraints on Default Prediction around the World
Mark G. Maffett
University of Chicago - Booth School of Business
Edward L. Owens
University of Rochester - Simon School of Business
National University of Singapore - Department of Finance
May 28, 2014
Simon School Working Paper No. FR 13-22
We examine how short-sale constraints affect the accuracy of default prediction. Consistent with short selling improving the informational efficiency of stock prices, on average, we show that overall predictive accuracy is greater in countries where short selling is less constrained. However, in countries with fewer short-sale constraints, predictive accuracy with respect to non-default observations is lower, particularly during periods of high macroeconomic uncertainty, which suggests an informational cost of short selling. Consistent with prices being less efficient where short selling is constrained, the incorporation of financial statement data mitigates the loss in predictive accuracy, particularly where transparency is high.
Number of Pages in PDF File: 66
Keywords: default prediction, short selling constraints, financial reporting transparency
JEL Classification: G14, G15, G33, G38, M41working papers series
Date posted: July 23, 2013 ; Last revised: May 29, 2014
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