Equity Lending and Mutual Fund Performance

46 Pages Posted: 11 Jun 2012

See all articles by Richard B. Evans

Richard B. Evans

University of Virginia - Darden School of Business

Miguel A. Ferreira

Nova School of Business and Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Melissa Porras Prado

Nova School of Business and Economics

Date Written: June 11, 2012

Abstract

A mutual fund board’s decision to approve an equity lending program entails an important trade-off. While equity lending can generate additional income for shareholders, it also enables the short-selling of stocks owned by the fund, which could negatively impact stock prices and fund performance. We empirically examine this trade-off using a sample of U.S. active and passive equity mutual funds. From 1996 to 2009, the percentage of funds that lend equities quadruples, from 13% to over 40%. We examine the determinants of the decision to lend out shares, the percentage of the overall portfolio being lend out and the income generated by security lending. Looking at performance we find that active funds that engage in share lending under perform other funds. Our findings suggest that short sellers have an information advantage over mutual funds and that mutual funds are restricted in acting on the information signal of short sellers.

Keywords: mutual funds, Index funds, performance, security lending

JEL Classification: G12, G14, G15, G23

Suggested Citation

Evans, Richard B. and Ferreira, Miguel Almeida and Porras Prado, Melissa, Equity Lending and Mutual Fund Performance (June 11, 2012). Available at SSRN: https://ssrn.com/abstract=2081684 or http://dx.doi.org/10.2139/ssrn.2081684

Richard B. Evans

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4030 (Phone)
434-243-7680 (Fax)

HOME PAGE: http://faculty.darden.virginia.edu/evansr/

Miguel Almeida Ferreira

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Melissa Porras Prado (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

Register to save articles to
your library

Register

Paper statistics

Downloads
44
Abstract Views
330
PlumX Metrics