Short-selling threats and bank risk-taking: Evidence from the financial crisis

Dien Giau Bui, Iftekhar Hasan, Chih Yung Lin*, Hong Thoa Nguyen

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

The focus of this paper is whether the Securities and Exchange Commission's Regulation SHO strengthens or weakens the effect of short-selling threats on banks’ risk-taking. The evidence shows that pilot banks with looser constraints on short-selling increased their risk-taking during the financial crisis of 2007–2009. The reason is that short-selling threats improved the information environment and mitigated the agency problems of banks during the pilot program that led to greater risk-taking by pilot banks. Additionally, this effect is mainly driven by pilot banks with poor corporate governance, or high information asymmetry. Overall, our paper provides novel evidence that the disciplinary role of short-sellers had a positive effect on bank risk-taking during the financial crisis.

Original languageEnglish
Article number106834
JournalJournal of Banking and Finance
Volume150
DOIs
StatePublished - May 2023

Keywords

  • Bank risk-taking
  • Corporate governance
  • Information asymmetry
  • Regulation SHO
  • Short-selling threats

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