Financial institutions may be vulnerable to predatory short selling. When the stock of a financial institution is shorted aggressively, leverage constraints imposed~by short-term creditors can force the institution to liquidate long-term investments at fire~sale prices. For financial institutions that are sufficiently close to their leverage constraints,~predatory short selling equilibria co-exist with no-liquidation equilibria (the vulnerability~region) or may even be the unique equilibrium outcome (the doomed region). Increased~coordination among short sellers expands the doomed region, where liquidation is the~unique equilibrium. Our model provides a potential justification for temporary restrictions~on short selling of vulnerable institutions and can be used to assess recent empirical~evidence on short-sale bans.
}, year = {2014}, journal = {Review of Finance}, volume = {18}, pages = {2153-2195}, url = {http://rof.oxfordjournals.org/content/early/2013/10/29/rof.rft043.short}, note = {Winner of Pagano-Zechner Prize
}, language = {eng}, }