Are Short Sellers Informed? Evidence From Credit Rating Agency Announcements

Abstract

Although constrained by rules and regulations, informed short selling (tipping) is present before negative credit watch and certain types of rating downgrade announcements. Using entity credit rating and daily short sale data from April 2004 to December 2009, we find that preannouncement abnormal short selling significantly increases toward the announcement dates and is negatively related to postannouncement stock returns. Furthermore, short selling driven by tipping is more pronounced before more severe and more surprising rating downgrades. This study provides evidence favoring the private information hypothesis (tipping) in the ongoing debate of the informational advantage of short sellers.

Accounting conservatism and short selling: Evidence from China

“…However, it is also possible that short selling may be speculative in nature, and it may exert potential downward pressure on prices, thereby further destabilizing firm fundamental value. As sophisticated traders, short sellers are able to trade on different types of bad news, including downgrading of bond ratings (Henry, Kisgen, & Wu, ), credit watch events (Shi, Wang, & Zhang, ), and analysts’ downward recommendations (Christophe, Ferri, & Hsieh, ). Short sellers have strong incentives to exploit bad news about firms as a means to reap profits, especially given the speculative nature of the Chinese stock market (Mei, Scheinkman, & Xiong, ).…”

Short selling and options trading: A tale of two markets

“…Substantial work examines the information content of short sales in non‐REIT equity securities. These studies find evidence suggesting that short sellers possess an informational advantage (see, e.g., Boehmer et al, 2008; Bris et al, 2007; Brockman & Hao, 2011; Figlewski & Webb, 1993; Figlewski, 1981; Flynn, 2010; Jiao et al, 2016; Nagel, 2005; Rubinstein, 2004; Shi et al, 2017). More relevant to the current investigation, a small number of papers examine short selling within the REIT equity market.…”

Is options trading informed? Evidence from credit rating change announcements

“…I also exclude rating changes that are preceded by a prior credit watch. A credit watch indicates that credit quality has changed to a point where its rating needs to be revised (Shi, Wang, & Zhang, ), so a rating change preceded by a credit watch could be well anticipated by the market participants. In addition, I delete credit rating changes with earnings announcements occurring within the 5‐day event window [−3, 1] around rating change announcement dates.…”