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

See all articles by Dien Giau Bui

Dien Giau Bui

National Taiwan University, Department of Finance, Students

Chih-Yung Lin

National Chiao-Tung University

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Date Written: June 23, 2017

Abstract

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

Bui, Dien Giau and Lin, Chih-Yung and Lin, Tse-Chun, Do short sellers exploit the persistent risk culture of banks? Evidence from two banking crises (June 23, 2017). Available at SSRN: https://ssrn.com/abstract=2781009 or http://dx.doi.org/10.2139/ssrn.2781009

Dien Giau Bui

National Taiwan University, Department of Finance, Students ( email )

1, Sec. 4, Roosevelt Road
Taipei
Taiwan

Chih-Yung Lin (Contact Author)

National Chiao-Tung University ( email )

Taiwan

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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