Short sellers were early indication of 2008 crisis
10 January 2014 Dallas
Image: Shutterstock
Actions of short sellers likely provided an early warning of banks’ upcoming distress prior to the 2008 crisis, an academic study has suggested.
The report, authored by Hemang Desai of the Southern Methodist University, found a significant cross-sectional association between the banks’ Q4 2006 financials and bank failures over 2008-2010, suggesting that the financial statements reflected at least some of the increased risk of bank distress in advance.
There was a dramatic increase in the level of abnormal short interest from 0.66 percent in March 2005 to 2.4 percent in March 2007 and a further increase to 4.48 percent in March 2008.
This increase in short interest is also accompanied by a sharp increase over time in the crosssectional association between short interest and leading financial statement indicators.
The evidence thus suggests that short sellers apparently recognised that the banks’ valuation and performance could not be sustained well before the crisis actually hit, said the report.
In contrast, Desai observed no real change change in analysts’ recommendations, Standard and Poor’s credit ratings and audit fees nor an increased sensitivity of these actions to financial indicators of bank distress over this time period.
The full report can be found here: here
The report, authored by Hemang Desai of the Southern Methodist University, found a significant cross-sectional association between the banks’ Q4 2006 financials and bank failures over 2008-2010, suggesting that the financial statements reflected at least some of the increased risk of bank distress in advance.
There was a dramatic increase in the level of abnormal short interest from 0.66 percent in March 2005 to 2.4 percent in March 2007 and a further increase to 4.48 percent in March 2008.
This increase in short interest is also accompanied by a sharp increase over time in the crosssectional association between short interest and leading financial statement indicators.
The evidence thus suggests that short sellers apparently recognised that the banks’ valuation and performance could not be sustained well before the crisis actually hit, said the report.
In contrast, Desai observed no real change change in analysts’ recommendations, Standard and Poor’s credit ratings and audit fees nor an increased sensitivity of these actions to financial indicators of bank distress over this time period.
The full report can be found here: here
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