Can Short Sellers Inform Bank Supervision?

48 Pages Posted: 27 Feb 2016

See all articles by Bhanu Balasubramanian

Bhanu Balasubramanian

University of Akron - College of Business Administration - Department of Finance

Ajay A. Palvia

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Date Written: February 25, 2016

Abstract

We investigate the timeliness and accuracy of supervisory information and short seller signals to assess whether short sellers have the potential to inform bank supervision. We find that short interest in bank equity increases prior to supervisory ratings downgrades but does not decrease prior supervisory ratings upgrades. Our tests of the relative forecasting accuracy of short seller signals and supervisory ratings indicate short sellers accurately assess the changes for both deteriorating and improving bank fundamentals, but do not focus on the same fundamental variables as regulators. Our results indicate that short seller signals have the potential to complement bank supervision in monitoring bank risk.

Keywords: Short sellers, Bank Regulation, Market Discipline, Bank supervision

JEL Classification: G28, G14, G21

Suggested Citation

Balasubramanian, Bhanu and Palvia, Ajay A., Can Short Sellers Inform Bank Supervision? (February 25, 2016). Available at SSRN: https://ssrn.com/abstract=2737993 or http://dx.doi.org/10.2139/ssrn.2737993

Bhanu Balasubramanian (Contact Author)

University of Akron - College of Business Administration - Department of Finance ( email )

259 S. Broadway
Akron, OH 44325
United States

Ajay A. Palvia

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

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