Keywords

predatory trading, short selling, predictable returns

Abstract

We find evidence of predatory trading in the corporate bond market. Exploiting novel data on the short selling behavior of institutional investors, we demonstrate that short sellers target those bonds likely to experience the largest negative events in the future: bonds about to be downgraded to junk status, and specifically those held by insurance companies and other institutions that are required to liquidate when bonds fall to junk status. We show that shorting in these bonds predicts large negative returns, which largely reverse over the next year. Short sellers’ trading activity is premeditated: they build up large short positions in a firm’s liquid bonds first, and then help to trigger cascades and downgrades by subsequently heavily shorting illiquid bonds after they have already built up these large positions.

Original Publication Citation

Market Predators, 2023, with Lauren Cohen and Christopher Malloy.

Document Type

Working Paper

Publication Date

2021

Language

English

College

Marriott School of Business

Department

Finance

University Standing at Time of Publication

Full Professor

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