Equity-Market Trading Restrictions and Credit Prices: Evidence from Short-Sale Constraints around the World

• In Event: Information and credit prices

Abstract

We examine how equity-market trading restrictions, such as short-selling constraints (SSCs), affect credit prices. Using a broad international sample, we examine three specific sources of variation in SSCs—country-level variation in short borrowing, time-series variation across countries in the implementation of targeted short-selling bans during the 2008 financial crisis, and the randomized Regulation SHO experiment in the U.S. Across all three analyses, we find that greater SSCs are associated with significantly higher credit-default-swap spreads, which implies that such constraints could affect the efficiency of resource allocation via credit markets. Further, we document that it is more difficult to accurately assess default risk in the presence of SSCs. This latter finding corroborates a loss of default-risk-relevant information as a channel through which SSCs lead to higher credit prices and suggests that SSCs limit the extent to which equity prices reflect both public and private information.

Authors

• Mark G Maffett, The University of Chicago

• Edward Owens, Emory University