A Multiple Lender Approach to Understanding Supply and Search in the Equity Lending Market

Abstract

Although a large body of research has investigated the effects of short sale constraints, very little is understood about the origin of these constraints in the one-trillion-dollar equity lending market. Using a unique database comprising data from twelve lenders, we find significant dispersion in share loan fees across lenders, and we find that the dispersion is increasing in share loan demand and various proxies for search costs, including a stock's illiquidity and the number of small lenders making loans. These findings are consistent with the existence of search frictions between share borrowers and lenders, as Duffie, Garleanu, and Pedersen (2002) suggest. We further analyze the effect of search frictions by examining the response of shorting cost to exogenous shocks in demand. We find that for stocks with moderate demand, loan fees are largely insensitive to demand shocks. However, for stocks with high demand, an increase in demand triples the already higher abnormal loan fees. Our findings help reconcile seemingly conflicting findings in the literature regarding the existence of both small and large effects of shifts in demand on price. We highlight the importance of search costs by showing that the various parameters in firms' share loan supply schedules are closely related to crosssectional differences in search costs. We conclude that short sale constraints could be slackened by the reintroduction of a central clearinghouse of share loans, which would reduce search costs.

In short supply: Short-sellers and stock returns

“…Several studies argue that the market for equity and the market for security lending should be studied jointly (Geczy et al, 2002;Blocher et al, 2013;Engelberg et al, 2013;Kolasinski et al, 2013). These studies typically use data from a small number of institutional lenders over a limited time period.…”

“…Using a tax-driven supply shock, the authors show when supply is reduced around dividend record dates, prices of hard-to-borrow stocks increase while prices of easy-to-borrow stocks are unaffected. In a related study, Kolasinski et al (2013) examine the impact of demand shocks on lending fees. This study shows that at high demand levels, further increases in demand lead to significantly higher fees, but that at moderate demand levels fees are largely insensitive to demand shocks.…”

Alphanomics: The Informational Underpinnings of Market Efficiency

“…See D'Avolio [ ], Fabozzi [2004, Kolasinski et al [2013], and Beneish et al [2015] for good summaries of institutional details on equity loan markets. equity loans.…”

The Governance Effect of the Media's News Dissemination Role: Evidence from Insider Trading

“…RavenPack has been increasingly used in the literature (e.g., Kolasinski, Reed, and Ringgenberg [], Dang, Moshirian, and Zhang [], Shroff, Verdi, and Yu []).…”