The focus of this paper is whether the Securities and Exchange Commission's Regulation SHO strengthens or weakens the effect of short-selling threats on banks’ risk-taking. The evidence shows that pilot banks with looser constraints on short-selling increased their risk-taking during the financial crisis of 2007–2009. The reason is that short-selling threats improved the information environment and mitigated the agency problems of banks during the pilot program that led to greater risk-taking by pilot banks. Additionally, this effect is mainly driven by pilot banks with poor corporate governance, or high information asymmetry. Overall, our paper provides novel evidence that the disciplinary role of short-sellers had a positive effect on bank risk-taking during the financial crisis.

We investigate the effect of managerial ability versus luck on bank loan contracting. Borrowers showing a persistently superior managerial ability over previous years (more likely due to ability) enjoy a lower loan spread, while borrowers showing a temporary superior managerial ability (more likely due to luck) do not enjoy any spread reduction. This finding suggests that banks can discern ability from luck when pricing a loan. Firms with high-ability managers are more likely to continue their prior lower loan spread. The spread-reduction effect of managerial ability is stronger for firms with weak governance structures or poor stakeholder relationships, corroborating the notion that better managerial ability alleviates borrowers’ agency and information risks. We also find that well governed banks are better able to price governance into their borrowers’ loans, which helps explain why good governance enhances bank value.

We use lottery jackpot winnings in a neighborhood as an exogenous shock to investing in stocks. We find that retail investors whose brokerages are near the stores that sell winning tickets buy more stocks than their counterparts after the shock. These purchases lead to lower returns. We use a survey to identify the behavioral factors like regretfulness and probability weighting that are the main drivers of our findings. Moreover, these investors tend to buy more lottery-like stocks, but the shock does not affect their selling decisions. Finally, we perform several falsification tests and robustness checks and find consistent results.

This paper introduces a novel measure to quantify firms’ sensitivity to shifts in bilateral trade flows between the United States and its trading partners. We exploit the 2016 U.S. presidential election as an exogenous shock to trade policy expectations and assess the stock market reactions of firms across 52 countries. Our findings indicate that firms with higher trade policy sensitivity experienced significantly more negative stock returns surrounding the election. These results are robust to variations in event windows, return model specifications, and alternative estimations of trade policy sensitivity.