Short-selling Profitability, Stock Lending Fees, and Asset Pricing Anomalies

Abstract

We measure a stock’s short-selling profitability (SSP) as its price sensitivity to short-selling activities over recent periods. Our findings show that short-selling strongly and negatively predicts future returns, particularly among high-SSP stocks. Furthermore, we identify SSP as a novel determinant of stock lending fees in the cross-section. While the profitability of anomalies decreases when accounting for short-selling fees, they remain exploitable among high-SSP stocks. These results support the presence of a stock lending market in which lenders allow short sellers to retain a portion of arbitrage profits. This suggests that short-selling constraints alone do not fully explain the persistence of anomalies, especially among high-SSP stocks.

Keywords: Short-selling fees, Stock lending market

JEL Classification: G12