Some Seem to Know: Banks’ Lending Decisions After Activist Short Sellers’ Attacks

62 Pages Posted: 5 Oct 2023 Last revised: 25 Jan 2024

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

Simon Fraser University; City University of Hong Kong

Albert Mensah

HEC Paris - Accounting and Management Control Department

Luc Paugam

HEC Paris, Accounting and Management Control Department; CFA Society France

Hervé Stolowy

HEC Paris - Accounting and Management Control Department

Date Written: September 6, 2023

Abstract

Activist short sellers publicly disseminate influential negative information about attacked firms. While equity investors strongly react to these reports, it is unclear if lending banks learn from the information released by short sellers. We examine whether and how activist short sellers’ attacks relate to banks’ lending activities. As far as existing loans are concerned, we find no evidence that existing loan agreements are more likely to be renegotiated following allegations by activist short sellers. We find, however, that in the cross-section, this null-average result on renegotiation is explained by disparate, countervailing bank behaviors: some banks hitherto adopted non-renegotiation risk-mitigation measures (such as imposing restrictive covenants) and, as such, were less likely to renegotiate loans following short sellers’ attacks, whereas other banks did not take such actions and, as such, had stronger incentives to renegotiate loans following the attacks. As regards new loans, we find, on average, that banks increase loan pricing following activist short sellers’ allegations (even after controlling for ex-post changes in credit risk). We interpret loan pricing results not explained by ex-post changes in credit risk as rent extraction by banks. Overall, our findings indicate that: (i) some banks seem not to learn from activist short sellers, whereas others seem to; and (ii) banks can also exploit short sellers’ attacks as an opportunity to extract value from attacked firms seeking new loans. This study contributes to our understanding of the information role of activist short sellers relative to other informed market participants.

Keywords: activist short sellers, private debt, loan pricing, information

JEL Classification: M41, G21, G10

Suggested Citation

Kim, Jeong-Bon and Mensah, Albert and Paugam, Luc and Stolowy, Hervé, Some Seem to Know: Banks’ Lending Decisions After Activist Short Sellers’ Attacks (September 6, 2023). HEC Paris Research Paper No. ACC-2023-1497, Available at SSRN: https://ssrn.com/abstract=4567750 or http://dx.doi.org/10.2139/ssrn.4567750

Jeong-Bon Kim

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Albert Mensah (Contact Author)

HEC Paris - Accounting and Management Control Department

Jouy-en-Josas
France

HOME PAGE: http://https://www.hec.edu/en/faculty-research/faculty-directory/faculty-member/mensah-albert

Luc Paugam

HEC Paris, Accounting and Management Control Department ( email )

1 avenue de la libération
Jouy-en-Josas, 78350
France

CFA Society France ( email )

54 avenue Hoche
Paris, 75008
France

Hervé Stolowy

HEC Paris - Accounting and Management Control Department ( email )

Jouy-en-Josas Cedex
France
+33 1 39 67 94 42 (Phone)
+33 1 39 67 70 86 (Fax)

HOME PAGE: http://www.hec.fr/stolowy

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