Let The Bear Beware: What Drives Stock Recalls
47 Pages Posted: 30 Aug 2016 Last revised: 29 Jan 2018
Date Written: July 28, 2017
We exploit joint dynamics of lendable and lent shares in the equity lending market to measure recall activity by lenders. We find that high recall activity predicts poor stock performance and precedes the lowest returns by two months. This suggests that short sellers are forced out of otherwise profitable positions prematurely. Short sellers lose more of their potential profits if lenders have access to non-public information signals, if high inventory concentration and correlated signals among lenders limit loan diversification, and if negative information diffuses slowly in the market. Overall, we establish that informational sophistication of lenders is the primary driver of informative stock recalls, which are most damaging to profitable short positions.
Keywords: Short Selling, Recall Risk, Securities Lending
JEL Classification: G11, G14, G23
Suggested Citation: Suggested Citation