Short selling disclosure and its impact on CDS spreads

Published in The European Journal of Finance (available online at:https://www.tandfonline.com/eprint/RT48C5NUN5U9BYWKURWR/full?target=10.1080/1351847X.2020.1858129)

Posted: 23 Apr 2020 Last revised: 26 Jan 2021

See all articles by Denisa Lleshaj

Denisa Lleshaj

Ruhr University of Bochum

Jannik Kocian

Ruhr University of Bochum - Department of International Accounting

Date Written: January 22, 2020

Abstract

The European Union introduced Regulation 236/2012 in 2012 to address short selling and certain aspects of credit default swaps (CDS). Consequently, a uniform short position disclosure regime was developed, which is used in this paper to examine CDS spreads as a proxy for credit risk around public short sale announcements and evaluate the disclosure policy's relevance from the debtholder's perspective. Existing literature documents short selling regulations’ impacts on the stock market, but no evidence exists from the CDS market. Therefore, we first conduct an event study to examine the effects of different short sale events on corresponding firms’ CDS spreads between 2012 and 2018. Moreover, we use regression analyses to control for several credit risk determinants that may also affect CDS spreads. Our evidence suggests that opening and increasing short positions are perceived as negative information, and in this regard lead to higher CDS spreads. In contrast, CDS spreads tend to be lower if short positions decrease or close. Additionally, we find that negative information ceteris paribus more strongly affects CDS spreads than positive information. Finally, we investigate certain anticipatory reactions when negative news enters the CDS market.

Keywords: Short selling, investor behavior, credit default swaps, ESMA, transparency

JEL Classification: G14, G15, G18, G23

Suggested Citation

Lleshaj, Denisa and Kocian, Jannik, Short selling disclosure and its impact on CDS spreads (January 22, 2020). Published in The European Journal of Finance (available online at:https://www.tandfonline.com/eprint/RT48C5NUN5U9BYWKURWR/full?target=10.1080/1351847X.2020.1858129), Available at SSRN: https://ssrn.com/abstract=3574067 or http://dx.doi.org/10.2139/ssrn.3574067

Denisa Lleshaj (Contact Author)

Ruhr University of Bochum ( email )

Bochum, 44780
Germany

Jannik Kocian

Ruhr University of Bochum - Department of International Accounting ( email )

Bochum
Germany

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