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

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

Journal of Banking & Finance, 2023, vol. 150, issue C

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.

Keywords: Regulation SHO; Short-selling threats; Bank risk-taking; Information asymmetry; Corporate governance (search for similar items in EconPapers)
JEL-codes: G02 G21 G32 G33 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:150:y:2023:i:c:s0378426623000596

DOI: 10.1016/j.jbankfin.2023.106834

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