PT  - JOURNAL ARTICLE
AU  - Stephen E. Christophe
AU  - Michael G. Ferri
AU  - Jim Hsieh
AU  - Tao-Hsien Dolly King
TI  - Short Selling and the Cross-Section of Corporate<br/>Bond Returns
AID  - 10.3905/jfi.2016.26.2.054
DP  - 2016 Sep 30
TA  - The Journal of Fixed Income
PG  - 54--77
VI  - 26
IP  - 2
4099  - https://pm-research.com/content/26/2/54.short
4100  - https://pm-research.com/content/26/2/54.full
AB  - This article studies the effect of short selling in the equity market on corporate bond returns. We show that firms with heavily shorted shares or large short-trade sizes experience significantly negative future bond returns. Further tests indicate that the relationship between short-trade size and subsequent bond returns is more consistent with stealth trading of short sellers. The impact of short selling on bond returns is robust to various controls for risk, liquidity, and other pricing factors. In examining the information source of short selling, we find that firms associated with heavy shorting activities or large short-trade sizes are likely to subsequently experience negative earnings surprises, higher credit risk, and reduced dividends. The evidence provides little support for the overvaluation argument. Overall, the results are consistent with the proposition that short trades in the equity market exert important valuation consequences in the corporate bond market.TOPIC: Fixed income and structured finance