Smart Equity Lending, Stock Loan Fees, and Private Information

54 Pages Posted: 20 May 2017 Last revised: 12 Jul 2021

See all articles by 357308 357308

357308 357308

George Washington University - Department of Finance

277062 277062

George Washington University - Department of Finance

106871 106871

George Mason University - Department of Finance

Date Written: July 10, 2021

Abstract

We document that stock lenders are informed about market conditions and pursue revenue
maximization by setting premiums or offering discounts on stock lending fees. Using a model
of supply and demand in the equity lending market, we illustrate the effect of stock borrowers'
private information on the elasticity of shorting demand. Smart lenders respond to demand
elasticity and increase their revenues through premiums or discounts on lending fees. Empirically, decomposing stock loan fees into intrinsic fee and premium or discount, we confirm
lenders' market awareness, showing that premiums and discounts among difficult-to-borrow
stocks both lead to increased lending revenues. This smart lending behavior has new implications about informed shorting, short interest, and transaction costs in the equity lending
market.

Keywords: short sales, lending fees, private information, equity mispricing, market frictions

JEL Classification: G11, G12, G14

Suggested Citation

357308, 357308 and 277062, 277062 and 106871, 106871, Smart Equity Lending, Stock Loan Fees, and Private Information (July 10, 2021). Available at SSRN: https://ssrn.com/abstract=2971096 or http://dx.doi.org/10.2139/ssrn.2971096

357308 357308

George Washington University - Department of Finance ( email )

Department of Finance, Funger Hall
2201 G Street, NW
Washington, DC 20052
United States
202-994-3669 (Phone)

277062 277062 (Contact Author)

George Washington University - Department of Finance ( email )

2201 G St NW
Funger Hall, Suite 501
Washington, DC 20052
United States
202-994-7478 (Phone)

HOME PAGE: http://business.gwu.edu/gergana-jostova

106871 106871

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

HOME PAGE: http://mason.gmu.edu/~aphilipo

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