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

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

Journal of Financial Stability, 2020, vol. 46, issue C

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.

Keywords: Short selling; Short interest; Financial crisis; Predictability; Persistent risky business models (search for similar items in EconPapers)
JEL-codes: G01 G14 G20 G32 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:46:y:2020:i:c:s1572308919306709

DOI: 10.1016/j.jfs.2019.100719

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