To Own or Not to Own: Stock Loans Around Dividend Payments
56 Pages Posted: 25 Jul 2020
Date Written: June 12, 2020
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: Suggested Citation