Supply Side Short-Selling Constraints: Who Is Buying When Shorts Are Selling?
46 Pages Posted: 9 May 2016 Last revised: 16 Dec 2016
Date Written: August 1, 2016
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: Suggested Citation