Abstract
We use a differences-in-difference setup, the SEC’s Regulation SHO Pilot program, to study how equity short selling affects the decisions of financial intermediation and the cost of private debt for firms. Our results show that bank loan spreads decline significantly for treated firms compared to control firms during the Pilot program period. The results are driven mainly by firms with high information asymmetry, high short-selling threat, and high loan-level and firm-level credit risks. Overall, our findings indicate that short selling helps reduce information asymmetry and agency problems between firms and banks, thereby resulting in loan spread reductions.
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