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Information Spillovers and Cross Monitoring between the Stock Market and Loan Market

45 Pages Posted: 17 Feb 2016 Last revised: 23 Jun 2016

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance

Fangzhou Liu

Indiana University - Kelley School of Business

Xuan Tian

Tsinghua University - PBC School of Finance

Date Written: February 1, 2016

Abstract

We explore information spillovers and cross monitoring between the stock and loan markets. To break simultaneity between the stock and loan markets, we use a regulatory experiment, Regulation SHO, that relaxes short selling constraints for a randomly selected sample of Russell-3000 stocks, which directly affects information production and monitoring by short sellers in the stock market but is exogenous to the loan market. We find that while firms without bank monitors exhibit a significant decline in stock prices upon the announcement of SHO, firms with bank monitors do not react. Further evidence shows that firms affected by SHO enjoy a 21 basis point lower loan spread that increases to 36 basis points for bank-dependent firms. Regulation SHO, however, does not appear to affect non-price loan terms such as loan maturity, amount, collateral, and covenants. Overall, our evidence suggests bi-directional information spillovers and cross monitoring between the stock and loan markets. The effects on loan markets are consistent with a reduction in the information monopoly that banks possess over their borrowers.

Keywords: short selling constraints, Regulation SHO, information spillover, cross monitoring, information monopoly, bank loan

JEL Classification: G14, G18, G21

Suggested Citation

Billett, Matthew T. and Liu, Fangzhou and Tian, Xuan, Information Spillovers and Cross Monitoring between the Stock Market and Loan Market (February 1, 2016). Kelley School of Business Research Paper No. 16-20. Available at SSRN: https://ssrn.com/abstract=2732784 or http://dx.doi.org/10.2139/ssrn.2732784

Matthew T. Billett (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3366 (Phone)

Fangzhou Liu

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Bloomington, IN 47405-1701
United States

Xuan Tian

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

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