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Distortions Caused by Institutional Securities Lending

38 Pages Posted: 6 Dec 2017  

Travis L. Johnson

The University of Texas at Austin - Department of Finance

Gregory Weitzner

University of Texas at Austin - Department of Finance

Date Written: November 30, 2017

Abstract

Mutual funds and ETFs that lend their shares to short-sellers often retain a fraction of the resulting fees rather than returning them to investors, incentiving them 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. Our model explains many empirical patterns: lending funds’ overweight high lending fee stocks, underperform, and charge lower management fees than non-lending funds; lending fees negatively predict future fee-exclusive and fee-inclusive stock returns; and conditions affecting lending markets often have no effect on equilibrium share prices.

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 Institutional Securities Lending (November 30, 2017). Available at SSRN: https://ssrn.com/abstract=3081123

Travis Johnson (Contact Author)

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

Red McCombs School of Business
Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/johnson

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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