Strategic Borrowing from Passive Investors: Implications for Security Lending and Price Efficiency

57 Pages Posted: 7 Mar 2019 Last revised: 17 Aug 2021

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

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: August 13, 2021

Abstract

We hypothesize that short-sellers strategically borrow shares from passive investors to reduce dynamic short-selling risks. This behavior drives up lending demand for stocks with high passive ownership, conditional on ownership by other investors. Consistent with our hypothesis, these stocks have better price efficiency, higher lending fees and higher short interest. They also exhibit lower risks of unexpected fee increases and loan recall, have longer loan durations, and attract better-informed short-sellers. These results are concentrated in hard-to-borrow stocks where short sale constraints are likely to bind. Our findings suggest that passive investing relaxes short-sale constraints by making borrowing shares less risky.

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: Implications for Security Lending and Price Efficiency (August 13, 2021). 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)

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

111 Washington Avenue
Newark, NJ 07102
United States

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