Are short sellers equally informed? Evidence from the US. credit rating announcements

Abstract

This study uses credit rating and daily short sale data of firms listed in NYSE from January 2015 to December 2021 to examine whether there is informed trading. Although post-announcement abnormal return is negatively correlated with abnormal short volume, no evidence of informed short selling is found. Higher level of pre-announcement abnormal short selling is positively correlated to default risk and also explained by the incentives of short sellers to short more when past returns are negative. Furthermore, increase in short selling that is preceded by credit watch placement is more pronounced before credit rating downgrades. Moreover, the evidence shows that cumulative abnormal return pre-announcement is positively and significantly correlated with the abnormal short sale activities pre-announcement. Lastly, this study provides evidence that institutional investors or medium or large trade size increase short position more heavily than smaller trade sizes.