The Effects of Stock Lending on Security Prices: An Experiment

Abstract:     
Working with a sizeable (greater than $15 billion in assets) anonymous money manager, we exogenously shift the supply of lendable shares for certain stocks by randomly making available for lending 2/3 of the stocks in the manager’s portfolio and withholding 1/3 of the stocks from the loan market. The lending program commenced in early September 2008 and the loans were recalled in mid-September 2008, with over $700 million of securities lent out at the peak of the study. During the lending (recall) period, returns to stocks randomly made available for lending were not lower (not greater) than returns to stocks randomly withheld from lending. Stocks randomly made available for lending experienced no differences in volatility, bid-ask spreads, or skewness than stocks randomly withheld from lending during either the lending or recall period. We find some evidence that loan supply increases volatilities and spreads for stocks with high short interest and expected loan spreads.

Working Paper Series