The Effects of Stock Lending on Security Prices: An Experiment
Chicago Booth Initiative on Global Markets Working Paper No. 42
Charles A. Dice Center Working Paper No. 2009-20
73 Pages Posted: 22 Oct 2009 Last revised: 30 Apr 2013
Date Written: August 24, 2012
We examine the impact of short selling by conducting a randomized stock lending experiment. Working with a large, anonymous money manager, we create an exogenous and sizeable shock to the supply of lendable shares by taking high-loan fee stocks in the manager’s portfolio and randomly making available and withholding stocks from the lending market. The experiment ran in two independent phases: the first, from September 5 to 18, 2008, with over $580 million of securities lent; and the second, from June 5 to September 30, 2009, with over $250 million of securities lent. While the supply shocks significantly reduce market lending fees and raise quantities, we find no evidence that returns, volatility, skewness, or bid-ask spreads are affected. The results provide novel evidence on the impact of shorting supply and do not indicate any adverse effects on stock prices from securities lending.
Keywords: Short Selling, Securities Lending, Stock Prices
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