Default Prediction Around the World: The Effect of Constraints on Pessimistic Trading

Mark G. Maffett, Edward L. Owens, Anand Srinivasan
2013 Social Science Research Network  
We examine how constraints on pessimistic trading affect the ability to assess a firm's likelihood of default using publicly available sources of information. Using cross-country differences in short selling as our primary empirical proxy for the ability of market participants to trade pessimistically, our results indicate that a dynamic multiperiod logit model accurately predicts 18 percentage points more actual occurrences of default in countries where short-selling is widely practiced. We
more » ... d little evidence that short selling restrictions reduce the proportion of inaccurately classified non-default observations. These associations are further identified using time-series variation in the introduction of put option trading. Finally, in countries that face significant pessimistic trading constraints, we document that the direct incorporation of accounting information leads to a greater improvement in default prediction accuracy, particularly where financial reporting transparency is relatively high.
doi:10.2139/ssrn.2296992 fatcat:5h7yyooik5cndhk6c5eireesp4