The Information Value of Stock Lending Fees: Are Lenders Price Takers?

Short Selling, the Supply Side: Are Lenders Price Makers?

“…In Brazil, contrasting with most other lending markets, as a result of the local regulatory system, all lending deals must be registered in the BM&FBOVESPA lending system. Reliable and frequently available information not only allows borrowers to locate securities faster but also allows lenders to observe demand and supply in real time and charge more competitive prices (Duong et al, 2016). This peculiarity of the Brazilian market is in favor of our results.…”

“…In general, it is argued that short selling is an operation that contributes to the efficiency of market information (e.g., Saffi and Sigurdsson, 2010;Boehmer and Wu, 2013;among others). Several empirical studies argue that short selling is beneficial to the market because short sellers convey new negative information and perform a governance role in discovering profit manipulation and discouraging management of fraudulent activities (Duong, Huszár, Tan and Zhang, 2016). Massa, Zhang and Zhang (2015) say that short selling encourages the release of private information by insiders.…”

“…According to Kolasinski et al (2013), the stock lending market remains relatively opaque, despite the increased accessibility of electronic networks, and claim that research costs can be reduced or possibly eliminated by the creation of a central reporting mechanism for sharing prices and loans availability. In this context, recent regulatory and market changes are giving potentially more bargaining power to lenders, placing them in a better position to manage their own lending desks (Duong et al, 2016). As a result, lenders have responded eagerly to maximize income from their portfolios (SEC, 2014).…”

“…On the supply side of the market, Duong, Huszár, Tan and Zhang (2016) state that high lending fees predict negative returns even after controlling for shorting demand, suggesting that there is an additional information component on the supply side. As suggested by Duffie, Gârleanu and Pedersen (2002), Duong et al (2016) posit that lenders incorporate not only the past and current shorting demands, but also the expected future demand in their lending fees.…”

The effect of the accidental disclosure of confidential short sales positions

“…3 2 ( ) = ( ) − ( ), where cost to borrow is equity borrowing costs expressed as an annualized percentage of the asset's market value on the date stated and industry cost to borrow is the industry average calculated by FIS ASTEC based on the Standard & Poor's global industry classification (GICS) to which a stock belongs. Note that Stratmann and Welborn (2016) and Duong et al (2017) also analyze these data from FIS ASTEC. 3 For robustness, we construct percentage-weighted portfolios as well (results available upon request).…”