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Are Short Sellers Informed? Evidence from the Bond Market

48 Pages Posted: 11 Jun 2012 Last revised: 27 Sep 2012

Ambrus Kecskes

York University - Schulich School of Business

Sattar Mansi

Virginia Tech

Andrew (Jianzhong) Zhang

University of Nevada, Las Vegas - Department of Finance

Date Written: June 11, 2012

Abstract

We examine whether short sellers in the equity market provide valuable information to investors in the bond market. Using a sample of publicly traded bond data covering the period from 1988 to 2011, we find that firms with high short interest have lower credit ratings and are more likely to have their ratings downgraded. We also find that firms with highly shorted stocks are associated with higher bond yield spreads (about 24 basis points). Evidence of causality from short interest spikes and a natural experiment based on the SEC’s Regulation SHO pilot program confirms our findings. Overall, our results suggest that equity short sellers provide predictive information to creditors in the bond market.

Keywords: short interest, credit ratings, bond yield spreads, financial reporting

JEL Classification: G12, G14

Suggested Citation

Kecskes, Ambrus and Mansi, Sattar and Zhang, Andrew (Jianzhong), Are Short Sellers Informed? Evidence from the Bond Market (June 11, 2012). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2081657 or http://dx.doi.org/10.2139/ssrn.2081657

Ambrus Kecskes

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Andrew (Jianzhong) Zhang

University of Nevada, Las Vegas - Department of Finance ( email )

4505 S. Maryland Parkway
Box 456008
Las Vegas, NV 89154-6008
United States

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