HEC Research Papers Series,
HEC Paris

Abstract: U.S. mutual funds that participate in the securities lending market extract information from stock borrowing. Active mutual funds exploit this information for trading by rebalancing their portfolios away from borrowed stocks, whereas passive funds do not. This trading avoids capital losses on borrowed stocks, whose prices tend to decrease. Active funds also trade more aggressively on stocks with more negative future returns, suggesting that they are able to identify informed borrowing. Finally, passive funds charge higher lending fees than active funds, which is consistent with short sellers paying a premium to lenders with lower recall risk.

Keywords: Securities lending; short selling; mutual funds

JEL-codes: G11; G12; G14

63 pages, October 15, 2020

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