Equity Short Selling and the Cost of Debt
43 Pages Posted: 16 Sep 2012
Date Written: June 1, 2012
Extant evidence suggests short sales have pertinent information about firm fundamentals. If so, then information from short selling in liquid equity markets can be informative for infrequently traded corporate bonds. The adverse information conveyed by short interest should mean higher cost of debt. Using a large sample of corporate bonds, we examine whether lagged equity short interest affect credit spreads. Highly shorted firms do experience wider credit spreads in the subsequent months. Moreover, the increase in short interest leads to higher credit spreads. Short interest thus seems to contain adverse information about firm fundamentals that can prove useful to bond investors.
Keywords: Short Interest, Cost of Debt, Credit Spread
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation