HEC Research Papers Series,
HEC Paris

Abstract: Activist short sellers publicly disseminate influential negative information about attacked firms. While equity investors strongly react to these reports, it is unclear if lending banks learn from the information released by short sellers. We examine whether and how activist short sellers’ attacks relate to banks’ lending activities. As far as existing loans are concerned, we find no evidence that existing loan agreements are more likely to be renegotiated following allegations by activist short sellers. We find, however, that in the cross-section, this null-average result on renegotiation is explained by disparate, countervailing bank behaviors: some banks hitherto adopted non-renegotiation risk-mitigation measures (such as imposing restrictive covenants) and, as such, were less likely to renegotiate loans following short sellers’ attacks, whereas other banks did not take such actions and, as such, had stronger incentives to renegotiate loans following the attacks. As regards new loans, we find, on average, that banks increase loan pricing following activist short sellers’ allegations (even after controlling for ex-post changes in credit risk). We interpret loan pricing results not explained by ex-post changes in credit risk as rent extraction by banks. Overall, our findings indicate that: (i) some banks seem not to learn from activist short sellers, whereas others seem to; and (ii) banks can also exploit short sellers’ attacks as an opportunity to extract value from attacked firms seeking new loans. This study contributes to our understanding of the information role of activist short sellers relative to other informed market participants.

Keywords: activist short sellers; private debt; loan pricing; information

JEL-codes: G10; G21; M41

62 pages, October 5, 2023

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