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

Abstract

We explore information spillovers and cross monitoring between the stock and loan markets around Regulation SHO. Our setting directly affects information production and monitoring in the stock market but is exogenous to the loan market. We find that only those firms without bank monitors exhibit significant stock price declines upon the announcement of SHO. SHO-affected firms with a bank loan experience a 21 basis point reduction in loan spreads. Regulation SHO, however, does not appear to affect non-price loan terms such as loan maturity, amount, collateral, and covenants. We also find the effect of SHO on earnings management does not depend on whether the firm has a bank relationship. Our evidence suggests bi-directional information spillovers and cross monitoring between these two markets, and they affect the loan markets through the reduction in 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