Workshop Series: Paul Griffin
This paper finds a precursor role of short sellers in conveying adverse information to the corporate bond market. We study this in two ways, by examining subsequent calendar month excess (risk-adjusted) bond returns for portfolios formed on the basis of high short interest in a prior month and by studying daily excess bond returns around earnings announcements. Our findings are consistent with the view that short interest plays an informational role in setting bond prices. In the context of earnings announcements, this occurs because short traders not only benefit from useful information prior to a news announcement, possibly from leakage or private access, but also because they perform a more insightful analysis of the announcement itself, where such analysis is reflected in prices with delay. A zero-investment hedge portfolio of bonds based on the most and least extreme high short interest positions generates a statistically significant annualized excess return of 3.84 percent. Taken together, these findings support the theoretical prediction of Diamond and Verrecchia (1987) - that higher levels of short interest convey adverse, pre-public information, thereby contributing to price discovery in securities markets.
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Paul Griffin is professor of management at the Graduate School of Management, University of California, Davis. Prior to Davis, he served as assistant professor at the Graduate School of Business, Stanford University. He has published over 50 articles in leading accounting and finance journals, five research monographs for the Financial Accounting Standards Board, and two case books on US corporate financial reporting. His research has had a substantial impact on the profession. According to a study of influential articles, he is one of a small group whose articles are now "classics" in the field. His recent publications in accounting and auditing focus on audit fee behavior, corporate governance under Sarbanes-Oxley, stock option compensation, and SEC reporting under Regulation FD. His current research projects examine relations between stock prices and greenhouse gas emissions and the informational role of short interest for corporate bond prices. Next year, Professor Griffin will begin a three-year term as co-editor of Accounting Horizons.