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

55 Pages Posted: 7 Mar 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: May 17, 2021

Abstract

We examine the effects of passive investing on security lending outcomes and price efficiency for the 2007-2017 period. These findings cannot be fully explained by the standard lending supply channel. While all institutional investors contribute to lending supply, only passive ownership improves price efficiency. Additionally, increased passive ownership correlates with higher lending fees and higher short interest. We propose a complementary, demand-based strategic borrowing channel wherein short-sellers prefer to borrow from passive investors to reduce dynamic short-selling risks. Consistent with our hypotheses, increased passive ownership is associated with lower fee, recall, and information leakage risks, and longer loan duration.

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 (May 17, 2021). Available at SSRN: https://ssrn.com/abstract=3848073 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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
20
PlumX Metrics