Do banks learn from financial markets? Evidence from loan contract pricing
52 Pages Posted: 23 May 2018 Last revised: 23 Jun 2020
Date Written: June 22, 2020
This paper examines the feedback effect between trading in financial markets and bank loan contracting. We find that banks charge higher loan rates for borrowers with higher short selling activities. This result is robust to various identification tests and robustness checks. We further find that this effect is not driven by bear raid risk but rather the information content of short selling. Supporting this argument, our result is stronger when the information asymmetry between the bank and the borrowing firm is greater. Overall, our findings suggest that the information content of short selling has important implications for bank loan costs.
Keywords: Short selling; Feedback effect; Information spillover; Syndicated loans; Bank loan costs
JEL Classification: G3, G32
Suggested Citation: Suggested Citation