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Connecting Two Markets: An Equilibrium Framework for Shorts, Longs and Stock Loans

52 Pages Posted: 15 Feb 2010 Last revised: 17 Nov 2012

Jesse Blocher

Vanderbilt University - Finance

Adam V. Reed

University of North Carolina Kenan-Flagler Business School

Edward Dickersin Van Wesep

University of Colorado at Boulder - Department of Finance

Date Written: February 11, 2010

Abstract

We analyze a framework for understanding the impact of the equity lending market on share prices. Using very few assumptions, we show that the effect of shocks to the supply or demand for share ownership, the fraction of shares made available to short sellers by shareholders, short sale regulations, and disagreement among investors depends critically on whether a stock is hard to borrow or freely available. Empiricists analyzing the effect of these shocks or short sale regulations will find that an effect exists largely among hard to borrow stocks. We confirm empirically these equilibrium predictions. For example, we find that when shares are removed from the equity lending market around dividend dates (due to tax considerations), prices of stocks on special increase 1.1%. Those prices then return to pre-dividend levels as shares are again made available to shorts.

Keywords: Short Selling, Supply and Demand, Equity Lending Market, Earnings Announcements, Dividends, Regulation

Suggested Citation

Blocher, Jesse and Reed, Adam V. and Van Wesep, Edward Dickersin, Connecting Two Markets: An Equilibrium Framework for Shorts, Longs and Stock Loans (February 11, 2010). Available at SSRN: https://ssrn.com/abstract=1551582 or http://dx.doi.org/10.2139/ssrn.1551582

Jesse Blocher (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Adam Reed

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Edward Van Wesep

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

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