Equity short selling and bank loan markets

Po Hsin Ho, Chih-Yung Lin, Tse Chun Lin

    Research output: Contribution to journalArticlepeer-review

    Abstract

    Using a difference-in-differences approach, we show that relaxation of short-sale constraints helps to filter out low-quality borrowers from the bank loan market. Treated firms that can still borrow from banks enjoy a lower loan spread, compared with control firms without this sorting mechanism. The results show that such treated borrowers have improved information asymmetry and credit risk, as well as better non-price contract terms. Overall, equity short selling has a real effect on the bank loan market by weeding out poor-quality borrowers, resulting in a lower cost of private debt for remaining borrower firms.
    Original languageAmerican English
    Pages (from-to)forthcoming
    Number of pages50
    JournalJournal of Money, Credit and Banking
    DOIs
    StatePublished - 2021

    Keywords

    • short selling
    • bank loan markets

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