Supply Side Short-Selling Constraints: Who Is Buying When Shorts Are Selling?

46 Pages Posted: 9 May 2016 Last revised: 16 Dec 2016

See all articles by Jesse Blocher

Jesse Blocher

Vanderbilt University - Finance

Chi Zhang

University of Massachusetts Lowell

Date Written: August 1, 2016

Abstract

The equity lending literature has assumed that equity loan supply is static due to institutional constraints. Instead, we show that reduced stock lending (both at the margin and in levels) causes increased stock loan fees and stock overpricing. We find the strongest effect among stocks with the highest disagreement, as suggested by theory. Investors buy and do not lend for two reasons. First, they prefer positive skewness: loan-supply-constrained stocks exhibit increased lottery-like return distributions. Second, loan supply restrictions cause short-term positive holding period returns, implicating them in stock overpricing.

Keywords: Securities Lending, Short Selling, Lottery Stocks, Investor Disagreement

JEL Classification: G12, G14, G23

Suggested Citation

Blocher, Jesse and Zhang, Chi, Supply Side Short-Selling Constraints: Who Is Buying When Shorts Are Selling? (August 1, 2016). Fox School of Business Research Paper No. 16-023, Available at SSRN: https://ssrn.com/abstract=2776815 or http://dx.doi.org/10.2139/ssrn.2776815

Jesse Blocher (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Chi Zhang

University of Massachusetts Lowell ( email )

Pulichino Tong Building
Manning School of Business
Lowell, MA 01854
United States

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