Short sellers and the failures of financial intermediaries

Abstract

This study examines whether short sellers can predict the failures of financial intermediaries. The sample consists of 2,457 financial intermediaries from 1990 to 2016. First, we show that short interest is positively correlated to the failures of financial intermediaries. Second, we construct two measures of abnormal short interest before a failure and find robust evidence that this interest is positively correlated to the failures. Our empirical results confirm that short sellers do predict the failures in financial intermediaries. Therefore, the trading information from short sellers could be a vital resource for the government to prevent the occurrence of financial instability. (C) 2019 Elsevier B.V. All rights reserved.