Equity Short Selling and the Bank Loan Market

51 Pages Posted: 24 Sep 2015 Last revised: 2 Jul 2019

See all articles by Chih-Yung Lin

Chih-Yung Lin

National Chiao-Tung University

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Po-Hsin Ho

National Central University at Taiwan - Department of Finance

Date Written: March 14, 2019

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.

Keywords: Reg SHO Pilot program, short selling, bank loan spread, information asymmetry, non-price contract terms

JEL Classification: G02, G21, G32, G33

Suggested Citation

Lin, Chih-Yung and Lin, Tse-Chun and Ho, Po-Hsin, Equity Short Selling and the Bank Loan Market (March 14, 2019). Available at SSRN: https://ssrn.com/abstract=2664496 or http://dx.doi.org/10.2139/ssrn.2664496

Chih-Yung Lin

National Chiao-Tung University ( email )

Taiwan

Tse-Chun Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Po-Hsin Ho

National Central University at Taiwan - Department of Finance ( email )

No. 300, Zhongda Rd.
Zhongli District
Taoyuan City, 32001
Taiwan

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