Do short sellers exploit risky business models of banks? Evidence from two banking crises

Journal of Financial Stability

Abstract

We 麍d that changes in short interest predict banks??stock returns during two recent banking crises. Furthermore, before the 2007??008 crisis, short interest increased more for banks with worse performance during the Long-Term Capital Management crisis of 1998. We also 麍d that changes in short interest predicted banks??loan quality and default risk during the 2007??008 crisis. The results are stronger for banks with higher levels of risk-taking. Overall, our 麍dings indicate that short sellers were informed about the persistent risky business models of banks and shorted those banks before the 2007??008 crisis. 穢 2019 Elsevier B.V. All rights reserved.

Source: Journal of Financial Stability