Strategic Borrowing from Passive Investors

55 Pages Posted: 7 Mar 2019 Last revised: 21 Nov 2023

See all articles by Darius Palia

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics; Columbia University - Law School

Stanislav Sokolinski

Michigan State University - Department of Finance

Date Written: November 16, 2023

Abstract

We find that short-sellers manage risks by strategically borrowing shares in stocks with significant ownership by passive investors. This practice increases securities lending demand for stocks with substantial passive ownership, resulting in improved price efficiency, higher lending fees, and increased short interest in these stocks. Consistent with the risk mitigation motive, these stocks show reduced risks of unexpected fee hikes and loan recall, longer loan durations, and attract more informed short-sellers. These effects are particularly pronounced in hard-to-borrow stocks where short-sale constraints are binding. Our study suggests that passive investing helps alleviate short-sale constraints by reducing the risks associated with stock borrowing.

Keywords: Security Lending, Short-Sales Constraints, Passive Asset Management, Market Efficiency

JEL Classification: G12, G14, G23

Suggested Citation

Palia, Darius and Sokolinski, Stanislav, Strategic Borrowing from Passive Investors (November 16, 2023). Available at SSRN: https://ssrn.com/abstract=3335283 or http://dx.doi.org/10.2139/ssrn.3335283

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics ( email )

111 Washington Street
MEC 134
Newark, NJ 07102
United States
973-353-5981 (Phone)
973-353-1233 (Fax)

Columbia University - Law School ( email )

435 W 116th St.
New York, NY 10027
United States

Stanislav Sokolinski (Contact Author)

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

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