Short Selling, the supply side: are lenders price makers?

Daniel Sales Casula () and Rodrigo De-Losso

No 2019_53, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: It is widely accepted in the literature that high lending fees predict negative returns because high fees capture the negative information that short sellers, on the demand side, detain. Traditionally, the supply side is seen as passive, with stock lenders acting as price takers. Recent studies, however, show that lenders are no longer passive. This study analyzes the Brazilian stock loan market, disentangling the shorting demand and supply curve shifts to understand the driving mechanism linking the supply side and stock returns. We also link the shorting supply curve with news announcements and verify how lenders react to new information in the market. Our results indicate that lenders decrease the loan supply when they predict negative future returns and use new information to change supply conditions, indicating that lenders are not price takers.

Keywords: short selling; loan fee; lenders; public information (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Date: 2019-12-19
New Economics Papers: this item is included in nep-cfn
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