Equity Short Selling and the Cost of Debt

43 Pages Posted: 16 Sep 2012

See all articles by Bilal Erturk

Bilal Erturk

Texas A&M University - Department of Finance

Ali Nejadmalayeri

University of Wyoming - College of Business

Date Written: June 1, 2012

Abstract

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

Erturk, Bilal and Nejadmalayeri, Ali, Equity Short Selling and the Cost of Debt (June 1, 2012). Midwest Finance Association 2013 Annual Meeting Paper, Available at SSRN: https://ssrn.com/abstract=2147060 or http://dx.doi.org/10.2139/ssrn.2147060

Bilal Erturk

Texas A&M University - Department of Finance ( email )

360 Wehner
College Station, TX 77843-4218
United States

Ali Nejadmalayeri (Contact Author)

University of Wyoming - College of Business ( email )

1000 E. University Avenue
Laramie, WY 82071
United States

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