Distortions Caused by Lending Fee Retention

52 Pages Posted: 6 Dec 2017 Last revised: 18 Nov 2019

See all articles by Travis L. Johnson

Travis L. Johnson

The University of Texas at Austin

Gregory Weitzner

McGill University

Date Written: November 15, 2019


Using newly-mandated disclosures, we show some fund managers retain a fraction of securities lending income by employing in-house lending agents. In a model with heterogeneous investors, we find this retention leads funds to "reach for lending fees" by overweighting high-fee stocks that endogenously underperform. We confirm our model’s predictions empirically: active mutual funds we identify as fee retainers invest more in high-fee stocks and underperform relative to both non-retaining and non-lending funds. We also show fee retention can explain the negative relation between lending fees and future fee-inclusive stock 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 Lending Fee Retention (November 15, 2019). 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

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5

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