Securities Lending and Information Acquisition

Abstract

We show that mutual funds use information acquired by participating in the equity lending market to make portfolio allocation decisions. Using data from German mutual funds on their stock-level lending decisions, we find that funds lending shares are more likely to exit positions relative both to stocks that they do not lend and to funds that do not lend. Lenders also avoid losses by better timing the closure of long positions than for stocks they do not lend. Finally, we show information acquisition in the lending market allows lenders to front-run public disclosure of large short positions. The results suggest that the securities lending market provides a mechanism for mutual funds to acquire information.

Keywords: Equity lending markets, mutual funds, short sales, short interest, price revelation, public disclosure

JEL Classification: G10, G12, G14, G18