Journal of Applied Finance & Banking

An Analysis of the Role of Short Selling in Detecting Default Risk

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• Abstract

   

  Default risk has been a significant factor for various organizations in this volatile business environment. The primary objective of this study is to examine the effect of short interest ratio on default risk. In this paper, data from 500 publicly traded US non-financial firms for the period from 2000 to 2023 are used, and the comparison of static and dynamic panel data models is done for estimating and forecasting default risk. Several factors were utilized to determine the probability of default, including gross profit margin, quick ratio, debt-to-equity ratio, stock return, and market capitalization. The study indicates that firm size and profitability are relevant factors in the mitigation of default risk. While debt and short stakes measure financial risks. This study contributes essential insight to the understanding of default risk, giving regulators and investors critical tools for analyzing organizations' financial health.

   

  Keywords: Default risk, Short interest levels, Debt to equity ratio, Dynamic panel probit model.