Do short sellers exploit risky business models of banks? Evidence from two banking crises

Chih-Yung Lin, Dien Giau Bui*, Tse Chun Lin

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

We find that changes in short interest predict banks’ stock returns during two recent banking crises. Furthermore, before the 2007–2008 crisis, short interest increased more for banks with worse performance during the Long-Term Capital Management crisis of 1998. We also find that changes in short interest predicted banks’ loan quality and default risk during the 2007–2008 crisis. The results are stronger for banks with higher levels of risk-taking. Overall, our findings indicate that short sellers were informed about the persistent risky business models of banks and shorted those banks before the 2007–2008 crisis.

Original languageEnglish
Article number100719
JournalJournal of Financial Stability
Volume46
DOIs
StatePublished - Feb 2020

Keywords

  • Financial crisis
  • Persistent risky business models
  • Predictability
  • Short interest
  • Short selling

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