Short Selling and Cross-Section of Corporate Bond Returns

Posted: 18 Jul 2013 Last revised: 23 May 2019

See all articles by Stephen E. Christophe

Stephen E. Christophe

George Mason University - Department of Finance

Michael G. Ferri

George Mason University

Jim Hsieh

George Mason University

Tao-Hsien Dolly King

University of North Carolina (UNC) at Charlotte - Department of Finance

Date Written: April 8, 2015

Abstract

This paper examines the relationship between short selling in the equity market and corporate bond returns. We show that both shorting activity and size of short trades are inversely correlated with contemporaneous bond returns. In addition, firms with heavily shorted shares or large short trade size experience significantly negative future bond returns. Further tests indicate that the relation between short trade size and subsequent bond returns is consistent with stealth trading of short sellers. The impact of both shorting activity and short trade size on bond returns is robust to various controls for risk, liquidity, and other pricing factors. In examining the sources of information in short selling, we find that firms associated with heavy short selling or large short trade size are likely to subsequently experience negative earnings surprises, higher credit risk, and reduced dividends. The overall results support the proposition that short trades in the equity market exert important valuation consequences in the corporate bond market.

Keywords: : short selling; short trade size; corporate bonds; stealth trading

JEL Classification: G11, G12, G14

Suggested Citation

Christophe, Stephen and Ferri, Michael G. and Hsieh, Jim and King, Tao-Hsien Dolly, Short Selling and Cross-Section of Corporate Bond Returns (April 8, 2015). https://doi.org/10.3905/jfi.2016.26.2.054. Available at SSRN: https://ssrn.com/abstract=2294660 or http://dx.doi.org/10.2139/ssrn.2294660

Stephen Christophe

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States
703-993-1767 (Phone)
703-993-1870 (Fax)

Michael G. Ferri

George Mason University ( email )

School of Management
4400 University Drive
Fairfax, VA 22030
United States
703-993-1858 (Phone)

Jim Hsieh (Contact Author)

George Mason University ( email )

4400 University Dr, MSN 5F5
George Mason University
Fairfax, VA 22030
United States

Tao-Hsien Dolly King

University of North Carolina (UNC) at Charlotte - Department of Finance ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
704-687-7652 (Phone)
704-687-6987 (Fax)

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