Do short sellers exploit the persistent risk culture of banks? Evidence from two banking crises
56 Pages Posted: 20 May 2016 Last revised: 24 Jun 2017
Date Written: June 23, 2017
We find that changes in short interest predict banks’ stock returns during two recent banking crises. More interestingly, before the 2007-2009 financial crisis, short interests increase more for banks that suffered more in the Long-Term Capital Management crisis of 1998. We also find that changes in short interest predict banks’ loan quality and default risk during the 2007-2009 crisis. The results are stronger for banks with higher levels of risk-taking behavior. Overall, our findings suggest that short sellers are informed about the persistent risk culture or risky business models of banks and short these banks before the 2007-2009 crisis.
Keywords: short selling; financial crisis; predictability; risk culture
JEL Classification: G01, G14, G20, G32
Suggested Citation: Suggested Citation