Passive Ownership and Short Selling

62 Pages Posted: 5 May 2023

See all articles by Daniel Schmidt

Daniel Schmidt

HEC Paris - Finance Department

Pekka Honkanen

University of Georgia - Terry College of Business

Bastian von Beschwitz

Board of Governors of the Federal Reserve System

Date Written: December, 2022

Abstract

We exploit quasi-exogenous variation in passive ownership around the Russell 1000/2000 cutoff to explore the causal effects of passive ownership on the securities lending market. We find that passive ownership causes an increase in lendable supply and short interest, while lending fees remain largely unchanged. The utilization ratio—i.e., the ratio of short interest over lendable supply—goes up, implying that shorting demand increases more than lendable supply. We argue that this additional demand results from an increase in the quality of lendable supply as passive funds are less likely to recall stock loans. Finally, we document that passive ownership-induced short selling improves information efficiency around negative earnings news.

Keywords: short selling, securities lending, etfs

JEL Classification: G12, G15, G11, G14

Suggested Citation

Schmidt, Daniel and Honkanen, Pekka and von Beschwitz, Bastian, Passive Ownership and Short Selling (December, 2022). International Finance Discussion Paper No. 1365, Available at SSRN: https://ssrn.com/abstract=4438781 or http://dx.doi.org/10.17016/IFDP.2022.1365

Daniel Schmidt (Contact Author)

HEC Paris - Finance Department ( email )

France
0652678597 (Phone)

HOME PAGE: http://daniel-schmidt.eu

Pekka Honkanen

University of Georgia - Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

Bastian Von Beschwitz

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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