Private Information, Securities Lending, and Asset Prices
71 Pages Posted: 30 Jul 2018 Last revised: 29 Feb 2020
Date Written: June 5, 2018
We study the roles of private information in the equity-lending market in an asset pricing model in which short sellers must pay a fee to borrow shares from long investors. When all investors are privately informed, an increase in the precision of private information always reduces the equity-lending fee by increasing trading aggressiveness and by decreasing demand dispersion among investors. However, when some investors are uninformed, the information asymmetry between informed and uninformed investors tends to put upward pressure on the lending fee, and thus, the overall effect of an increase in the precision of private information on the fee is ambiguous. We show that the equity-lending fee can be incrementally informative to an econometrician who otherwise observes only the stock price, a result that sheds light on the return predictability of lending fees observed in the data.
Keywords: Short Selling, Asset Prices, Equity Lending Fees, Information Asymmetry
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation