Short-Selling Threats and Bank Risk Taking.

Abstract

This study uses a difference-in-differences approach with the Securities and Exchange Commission’s Regulation SHO as the focus and examine whether the threat of short-selling can twist banks’ decisions. Our results show that leverage, operating risk, systemic risk, tail risk, and stock volatility are lower for treatment than for control banks listed in the Russell 3000 index. The evidence shows that treatment banks face looser short-selling constraints under the regulation, which reduces risk-taking. Additionally, these effects are driven mainly by treatment banks hampered by poor corporate governance. Overall, our paper provides novel evidence that short-selling threats can stabilize the financial market.