Literature Review: Short selling and its impact on liquidity & spreads of corporate bonds

Pitcher’s Name Robert Faff FoR category Cooperate Bonds Date Completed 14/12/18
(A) Working Title “Short selling and its impact on liquidity & spreads of corporate bonds”
(B) Basic Research i. To study and establish a relationship between the liquidity, spreads and overall market performance of the assets at the event
Question of short selling.
ii. To study and check if short selling activity impacts the overall ratings of the companies?
iii. To study and establish the relationship between the short selling and overall valuation of the companies.
(C) Key paper(s)  Allen, F. and Gale, D., “Stock-Price Manipulation”, Review of Financial Studies, vol. 5, no. 3, 1992, 509-529
 Boehmer, E. and Wu,J., “Short selling and the Price Discovery Process”, Review of Financial Studies, vol. 26, no. 2, 2013, 287-
322.
 Haruvy, E. and Noussair, C.N., “The Effect of Short Selling on Bubbles and Crashes in Experimental Spot Asset Markets”, The
Journal of Finance, vol. 61, no. 3, 2006, 1119-1157.
(D) Motivation/Puzzle To analyze an establish the relationship between the liquidity, spreads, valuations and ratings of a company.

THREE Three core aspects of any empirical research project i.e. the “IDioTs” guide
(E) Idea? The idea behind this work is to study and analyze if the short selling as an activity impacts the valuation as well as the ratings of the
organization. An attempt will also be made to check and analyze if this strategy is used by the competitors to take an edge over other
players in the market.

(F) Data? Data – spreads, stock prices, stock volumes, valuations & ratings
Source – Bloomberg, yahoo finance, google finance, Morningstar, inversting.com

(G) Tools? MS Excel primarily and may be SPSS or Eviews depending upon the tests decided.

Cued Template taken from Faff, Robert W., Pitching Research (March 22, 2015). Available at SSRN: http://ssrn.com/abstract=2462059 or
http://dx.doi.org/10.2139/ssrn.2462059
TWO Two key questions
(H) What’s New? The work attempts to establish a quantitative relationship between the parameters mentioned.

(I) So What? This will help to companies to understand the impact of short selling and they can take mitigating strategies if they are aware of the
level of impact that can happen.

ONE One bottom line

(J) Contribution? This issue is important from the shareholders’ wealth creation perspective. There can be a vicious circle where the short selling might
trigger a loss of market capital and the faith of the investors in the company. This will further reduce business opportunities for the
company and the valuation of its assets will go up while increasing the covenance. This would further increase the short selling and
ultimately impact the overall ratings of the company. So, its important for the companies to understand the impact and mitigation steps
of short selling.

(K) Other Data Collection – Secondary

Considerations Research method – mixed
Tools; no, have all necessary basic skills and will improve “on the job”
Target journals– Journal of Banking and Finance & industry reports
-“no result” risk: High as the data availability and relationship discovery can be a challenge
Scope: perhaps too many “moving parts”? It is ambitious to bring all moving parts to converge in one
direction.