Distortions Caused by Asset Managers Retaining Securities Lending Income

55 Pages Posted: 6 Dec 2017 Last revised: 31 Oct 2018

See all articles by Travis L. Johnson

Travis L. Johnson

The University of Texas at Austin

Gregory Weitzner

University of Texas at Austin - Department of Finance

Date Written: October 1, 2018

Abstract

Using newly-mandated disclosures, we show fund managers often retain a fraction of securities lending income by employing in-house lending agents at above-market rates. This retention incentivizes fund managers to overweight stocks with high lending fees. In a heterogeneous agent model, we show this incentive distorts equilibrium portfolio choices, fund performance, and asset pricing. We confirm our model's predictions empirically: fee-retaining active mutual funds overweight high lending fee stocks, underperform, and charge lower management fees. Our model also offers a new explanation for the negative relation between lending fees and future fee-inclusive returns.

Keywords: Share lending, short selling, mutual funds, ETFs, incentives, asset management

JEL Classification: G11, G12, G23

Suggested Citation

Johnson, Travis L. and Weitzner, Gregory, Distortions Caused by Asset Managers Retaining Securities Lending Income (October 1, 2018). Available at SSRN: https://ssrn.com/abstract=3081123 or http://dx.doi.org/10.2139/ssrn.3081123

Travis L. Johnson (Contact Author)

The University of Texas at Austin ( email )

2110 Speedway Stop B6600
Austin, TX Texas 78712
United States
6178995325 (Phone)

HOME PAGE: http://travislakejohnson.com

Gregory Weitzner

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

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