Distortions Caused by Lending Fee Retention
52 Pages Posted: 6 Dec 2017 Last revised: 18 Nov 2019
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: Suggested Citation