Equity Short Selling and the Bank Loan Market
Journal of Money, Credit and Banking, forthcoming.
51 Pages Posted: 24 Sep 2015 Last revised: 5 Jan 2021
Date Written: September 29, 2020
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: Suggested Citation