Premium
Information and Insurer Financial Strength Ratings: Do Short Sellers Anticipate Ratings Changes?
Author(s) -
Wade Chip,
Liebenberg Andre,
Blau Benjamin M.
Publication year - 2016
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12063
Subject(s) - business , stock (firearms) , stock price , balance sheet , monetary economics , actuarial science , economics , finance , mechanical engineering , paleontology , series (stratigraphy) , engineering , biology
Ratings of financial institutions have been shown to provide informational value as stock prices generally decrease in response to ratings downgrades. Moreover, insurer's stock prices have been observed to decrease 2 days prior to downgrades, suggesting that informed trading occurs during the predowngrade period. This study examines the trading activity of short sellers surrounding insurer financial strength ratings. We show that short selling is abnormally high during the predowngrade period—indicating that short sellers can predict rating downgrades. Interestingly, we find that predowngrade short selling is driven by stocks of insurers with the most transparent balance sheets. This result suggests that while short sellers can predict rating downgrades generally, the opaqueness of an insurer's assets and liabilities can inhibit informed trading during the predowngrade period.