Regulatory Enforcement Actions and Short Selling

US federal regulators impose enforcement actions on banks when they discover breaches of fiduciary duty. We find that short sellers anticipate enforcement actions six months before issuance, regardless of the state of the economy. After the infractions are settled, short selling decreases for banks with certain characteristics. Further, we find that large banks face less scrutiny from short sellers ahead of enforcement actions, a potential benefit of being Too Big to Fail. These findings may suggest that short interest serves as a signal for declining bank quality ahead of a formal investigation and improving conditions after the settlement.