To Own or Not to Own: Stock Loans Around Dividend Payments

56 Pages Posted: 25 Jul 2020

See all articles by Peter Dixon

Peter Dixon

U.S. Securities and Exchange Commission

Corbin Fox

James Madison University

Eric K. Kelley

University of Tennessee, Knoxville

Date Written: June 12, 2020

Abstract

In a standard stock loan, the borrower reimburses the lender any dividends paid while the loan is outstanding. Since these substitute dividends may be taxed differently than dividend payments themselves, some investors have incentives to either remove their shares from lend-able supply – if they pay high taxes on substitute dividends – or lend out their shares to arbitrageurs – if they pay high taxes on dividends. Consistent with these incentives, we find a significant tightening of the equity lending market on dividend record days driven by both a contraction of supply and an expansion of demand – although the demand effect appears to dominate. We then exploit the plausibly exogenous nature of these shifts to causally link tightness in the lending market to wider effective spreads in the stock market.

Keywords: equity lending, short selling, dividends, liquidity

JEL Classification: G14, G19

Suggested Citation

Dixon, Peter and Fox, Corbin and Kelley, Eric K., To Own or Not to Own: Stock Loans Around Dividend Payments (June 12, 2020). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3640375

Peter Dixon

U.S. Securities and Exchange Commission ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

Corbin Fox

James Madison University ( email )

Zane Showker Hall
Harrisburg, VA 22801
United States

Eric K. Kelley (Contact Author)

University of Tennessee, Knoxville ( email )

916 Volunteer Blvd
Knoxville, TN 37996
United States

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