To own or not to own: Stock loans around dividend payments

Peter N. Dixon, Corbin A. Fox and Eric K. Kelley

Journal of Financial Economics, 2021, vol. 140, issue 2, 539-559

Abstract: In a standard stock loan, the borrower reimburses the lender any dividends paid while the loan is outstanding. Since these substitute dividends may be taxed differently than dividend payments themselves, some investors have incentives to either remove their shares from lendable supply–if they pay high taxes on substitute dividends–or lend out their shares to arbitrageurs–if they pay high taxes on dividends. Consistent with these incentives, we find a significant tightening of the equity lending market on dividend record days driven by both a contraction of supply and an expansion of demand–although the demand effect appears to dominate. We then exploit the plausibly exogenous nature of these shifts to causally link tightness in the lending market to wider effective spreads in the stock market.

Keywords: Stock loans; Securities lending; Short selling; Dividend arbitrage (search for similar items in EconPapers)
JEL-codes: G12 G19 G29 H21 K34 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:140:y:2021:i:2:p:539-559

DOI: 10.1016/j.jfineco.2020.12.010

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