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Strategic borrowing from passive investors

Author

Listed:
  • Darius Palia
  • Stanislav Sokolinski

Abstract

We find that short sellers manage risks by strategically borrowing shares in stocks with significant ownership by passive investors. This practice increases securities lending demand for stocks with substantial passive ownership, resulting in improved price efficiency, higher lending fees, and increased short interest in these stocks. Consistent with the risk mitigation motive, these stocks show reduced risks of unexpected fee hikes and loan recall, longer loan durations, and attract more informed short sellers. These effects are particularly pronounced in hard-to-borrow stocks where short-sale constraints are binding. Our study suggests that passive investing helps alleviate short-sale constraints by reducing the risks associated with stock borrowing.

Suggested Citation

  • Darius Palia & Stanislav Sokolinski, 2024. "Strategic borrowing from passive investors," Review of Finance, European Finance Association, vol. 28(5), pages 1537-1573.
    • Handle: RePEc:oup:revfin:v:28:y:2024:i:5:p:1537-1573.
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    File URL: http://hdl.handle.net/10.1093/rof/rfae012
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    More about this item

    Keywords

    Security lending; short-sales constraints; passive asset management; market efficiency;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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