Which financial stocks did short sellers target in the subprime crisis?

Abstract

a b s t r a c tTracing the SEC ban on the short selling of financial stocks in September 2008, this paper investigates whether such selling activity before the 2008 short ban reflected financial companies' risk exposure in the subprime crisis. Evidence suggests that short sellers sold short stocks that had the greatest asset and insolvency risk exposures, and that the short selling of financial firms' stocks was not significantly greater than that of non-financial firms after we match them on firm size and insolvency risk. When the short ban was in effect, the market quality of financial stocks without subprime assets exposure had deteriorated to a larger degree than that of financial companies with subprime assets exposure. The findings imply that such a regulation may mute the market disciplining effects of investors and may also be seen as a counterweight to any perceived macro or systemic risk reduction benefits resulting from such a ban.

Does bank stakeholder orientation enhance financial stability?

“…Fifth, our paper extends the banking literature (see, e.g., Keeley, 1990;Laeven and Levine, 2009;Hasan, Massoud, Saunders, and Song, 2015;Ho, Huang, Lin, and Yen, 2016;Delis, Hasan, and Mylonidis, 2017) by showing that stakeholder orientation is an important determinant of bank risk taking and crisis performance. Finally, our paper relates to studies examining how constituency statutes affect corporate policies.…”

Equity Short Selling and the Bank Loan Market

“…This finding provides support for our hypothesis 17. Hasan et al (2015) find that short sellers short stocks that have the greatest asset and insolvency risk exposures during a financial crisis. Meanwhile, Massoud et al (2011) find that bank decisions might affect short selling by hedge funds.…”

“…In addition, this is one of a few studies that explore the interaction between the shortselling market and financial intermediaries. One example is Hasan et al (2015), who find that banks with subprime assets had higher levels of short interest during the financial crisis. We add to this line of research by showing that short selling reduces bank loan spreads via the sorting mechanism and reduced information asymmetry between firms and banks.…”

Testing of Short Sale Hypotheses on the U.S. Market in the Period from 1990 to 2015

“…Grullon et al (2015) investigate the impact of Regulation SHO that relaxes short-selling constraints on a random sample of U.S. stocks to test whether capital market frictions have an effect on stock prices and corporate decisions. Hasan et al (2015) investigate whether a such selling activity before the 2008 short ban reflected financial companies' risk exposure in the subprime crisis. Duong et al (2015) examine the impact of a market-wide mandatory disclosure policy on short selling on the Tokyo Stock Exchange.…”