Does Passive Investing Help Relax Short-Sale Constraints?

65 Pages Posted: 7 Mar 2019 Last revised: 9 Aug 2019

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 8, 2019

Abstract

Prior literature argues that passive investing mainly introduces price inefficiencies. This article presents a channel through which passive investing leads to more informative prices. We study the impact of passive investors’ security lending on short-sale constraints. Stocks with higher passive ownership exhibit larger short positions, lower lending fees and longer loan durations. This effect is significantly larger for passive than for active investors. Higher passive ownership is associated with lower cross-autocorrelations with negative market returns, less skewness, and a smaller value premium, especially among hard-to-borrow stocks. These results suggest that passive investing contributes to price efficiency by relaxing short-sale constraints.

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

JEL Classification: G12, G14, G23

Suggested Citation

Palia, Darius and Sokolinski, Stanislav, Does Passive Investing Help Relax Short-Sale Constraints? (August 8, 2019). 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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