Distortions Caused by Lending Fee Retention

Travis L. Johnson () and Gregory Weitzner ()
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Travis L. Johnson: McCombs School of Business, The University of Texas at Austin, Austin, Texas 78712
Gregory Weitzner: Desautels Faculty of Management, McGill University, Montreal, Quebec H3A1G5, Canada

Management Science, 2025, vol. 71, issue 1, 35-58

Abstract: Some mutual funds retain a fraction of securities lending income by employing in-house lending agents. In a model with heterogeneous investors and endogenous delegation to mutual funds, we show that a subset of funds optimally engages in lending fee retention and as a result, overweights high lending fee stocks that endogenously underperform. We find empirical evidence consistent with our model’s predictions; active mutual funds we identify as fee retainers invest more in high-fee stocks and underperform relative to both nonretaining and nonlending funds. We also show that fee retention helps explain the negative relation between lending fees and future fee-inclusive stock returns.

Keywords: finance; asset pricing; financial institutions; investment; short selling; mutual funds (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:1:p:35-58

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