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Deregulation of short-selling constraints and cost of bank loans: Evidence from a quasi-natural experiment

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  • Chen, Shenglan
  • Chou, Robin K.
  • Liu, Xiaoling
  • Wu, Yuhui

Abstract

Investors can sell short on designated stocks on China stock market since March 2010 when the CSRC relieved the short-selling constraints, which provides a quasi-natural experiment to examine how short selling affects the bank loan contracts. Using the 13,755 bank loan contracts from Chinese listed firms during 2007–2014, our results show that bank loan spreads decline significantly for treated firms compared to control firms after removing the short-selling constraints. Further, we find that the results are driven mainly by firms far from bank geographically, firms haven't relationship with bank in the prior 3 years, and firms with high default risk. Our findings provide further insight into the relationship between stock market and debt market, and are helpful to understand economic effect of short selling on the decision-making of other market participants.

Suggested Citation

  • Chen, Shenglan & Chou, Robin K. & Liu, Xiaoling & Wu, Yuhui, 2020. "Deregulation of short-selling constraints and cost of bank loans: Evidence from a quasi-natural experiment," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:pacfin:v:64:y:2020:i:c:s0927538x20306727
    DOI: 10.1016/j.pacfin.2020.101460
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    More about this item

    Keywords

    Financial market; Deregulation of short-selling constraints; Bank loan market; Quasi-natural experiment;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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