Stock Loan Fees, Private Information, and Smart Lending
49 Pages Posted: 20 May 2017 Last revised: 21 Jun 2019
Date Written: May 23, 2019
Decomposing lending fees into predicted (fair) and residual (premium or discount) fees reveals overpricing among a third of hard-to-borrow stocks: those for which borrowers pay a premium. Despite paying the highest fees, they are the only profitable shorters. Their net annualized profits of 5% reveal informed shorting. We also document smart lending. Lenders appear attuned to lending-market conditions, discounting fees on stocks with elastic shorting demand, thereby increasing revenues. Stocks with the most discounted fees attract the highest short interest, yet are predominantly easy-to-borrow. Their short sellers do not generate net shorting profits or appear motivated by private information.
Keywords: short sales, lending fees, private information, equity mispricing, market frictions
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation