Do banks learn from financial markets? Evidence from loan contract pricing

52 Pages Posted: 23 May 2018 Last revised: 23 Jun 2020

See all articles by Huu Nhan Duong

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

S. Ghon Rhee

University of Hawaii at Manoa - Shidler College of Business; University of Hawaii at Manoa - Department of Financial Economics and Institutions

Van Vu

Department of Economics, Finance and Marketing, La Trobe University

Date Written: June 22, 2020

Abstract

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

Duong, Huu Nhan and Rhee, S. Ghon and Vu, Van, Do banks learn from financial markets? Evidence from loan contract pricing (June 22, 2020). Available at SSRN: https://ssrn.com/abstract=3176371 or http://dx.doi.org/10.2139/ssrn.3176371

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

S. Ghon Rhee

University of Hawaii at Manoa - Shidler College of Business ( email )

2404 Maile Way
C-304, FEI/CBA
Honolulu, HI 96822
United States

University of Hawaii at Manoa - Department of Financial Economics and Institutions ( email )

United States

Van Vu (Contact Author)

Department of Economics, Finance and Marketing, La Trobe University ( email )

Melbourne, 3086
Australia

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