Short-selling and credit default swap spreads-Where do informed traders trade?

During the global financial crisis, short-selling and credit default swaps (CDS) gained notoriety as indicators of financial collapse. This paper extends the literature by examining the relationship between short-selling and CDS spreads. Results indicate that lagged short-selling metrics forecast changes in CDS spreads; short-selling is found to have a positive relationship with CDS spreads. These results are robust to various controls including the supply of stock for short-selling, changes in CDS spreads, cross-sectional controls for fixed effects, sub-group analysis by industry sector, and the use of contemporaneous explanatory variables. This suggests that informed traders prefer to short-sell the underlying stocks.