Stock Loan Fees, Private Information, and Smart Lending

49 Pages Posted: 20 May 2017 Last revised: 21 Jun 2019

See all articles by Brian J. Henderson

Brian J. Henderson

George Washington University - Department of Finance

Gergana Jostova

George Washington University - Department of Finance

Alexander Philipov

George Mason University - Department of Finance

Date Written: May 23, 2019

Abstract

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

Henderson, Brian Joseph and Jostova, Gergana and Philipov, Alexander, Stock Loan Fees, Private Information, and Smart Lending (May 23, 2019). Available at SSRN: https://ssrn.com/abstract=2971096 or http://dx.doi.org/10.2139/ssrn.2971096

Brian Joseph Henderson

George Washington University - Department of Finance ( email )

Department of Finance, Funger Hall
2201 G Street, NW
Washington, DC 20052
United States
202-994-3669 (Phone)

Gergana Jostova (Contact Author)

George Washington University - Department of Finance ( email )

2201 G St NW
Funger Hall, Suite 501
Washington, DC 20052
United States
202-994-7478 (Phone)

HOME PAGE: http://home.gwu.edu/~jostova

Alexander Philipov

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

HOME PAGE: http://mason.gmu.edu/~aphilipo

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