Abstract - Do Equity Short Sellers Anticipate Bond Rating Downgrades?

Short selling increases prior to credit rating downgrades. In the month preceding a credit
rating downgrade, short interest is 40% higher than one year prior, and short selling
returns to normal levels following a downgrade. Abnormal short interest is observed
prior to downgrades after matching against non-downgraded firms with similar
fundamentals, and after eliminating observations with coincident corporate
announcements. Short interest is higher for downgrades that have higher negative equity
announcement returns and for firms downgraded to speculative grade. The tests provide
evidence of informed trading in pre-downgrade short selling, but we find little evidence
of information leakage.

Darren Kisgen
Carroll School of Management, Boston College
26.Jan 2010

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