The Rise of the Equity Lending Market: Implications for Corporate Policies
68 Pages Posted: 15 Dec 2015 Last revised: 12 May 2018
Date Written: May 7, 2018
We model the effect of short selling constraints on corporate policies and empirically show how the equity lending market affects corporate behavior. Firms react to increases in the supply of lendable stocks by repurchasing shares and increasing investment, consistent with the theory that managers respond to manipulative shorting threats by signaling firm value through corporate policies. Firms also save more cash and issue more debt in response to shifts in the supply of lendable stocks. These various policy responses are coordinated and are more pronounced for firms with more liquid stocks, higher growth opportunities, tighter financing constraints, and when managers' personal compensation is more sensitive to stock prices.
Keywords: Equity lending markets, short sales, corporate policies, share repurchases, investment, savings
JEL Classification: G23, G32, G35
Suggested Citation: Suggested Citation