We find that stock price crashes are positively related to lagged short-selling cost. This relation is stronger for stocks with larger prior returns, consistent with bubble-like crashes due to limits-to-arbitrage. We also find stronger results for firms with lower absolute earnings surprises, lower short interests, and higher information uncertainty. Our findings are robust to alternative measures of crashes and short-selling cost. The results hold when adopting a difference-in-differences methodology based on the Reg-SHO Pilot Program and a fuzzy regression-discontinuity design based on Russell Index reconstitution, mitigating endogeneity
concerns.

In the conference, this paper has been selected as semi-finalist for Best Paper Award.