Passive ownership and short selling

Bastian von Beschwitz, Pekka Honkanen and Daniel Schmidt

Review of Finance, 2025, vol. 29, issue 4, 1137-1188

Abstract: We exploit quasi-exogenous variation in passive ownership around the Russell 1000/2000 cutoff to explore the causal effects of passive ownership on the securities lending market. We find that passive ownership causes an increase in lendable supply and short interest, while lending fees remain largely unchanged. The utilization ratio—that is, the ratio of short interest over lendable supply—goes up, implying that shorting demand increases more than lendable supply. We argue that this additional demand results from an increase in the quality of lendable supply as passive funds are less likely to recall stock loans. This higher supply quality attracts informed short sellers, who improve the information efficiency around negative news releases and correct overpricing.

Keywords: passive funds; ETFs; securities lending; short selling (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G15 (search for similar items in EconPapers)
Date: 2025
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