Short-Sale Constraints and Securities Lending by Exchange-Traded Funds

Managerial Finance, Vol. 39, No. 5, pp. 444 - 456 (2013)

Posted: 11 Nov 2012 Last revised: 19 Apr 2013

See all articles by Naresh Bansal

Naresh Bansal

Saint Louis University - Department of Finance

Ryan McKeon

University of San Diego; In-the-Money Options Trading

Marko Svetina

University of San Diego

Abstract

A stock's inclusion in an ETF has the potential to reduce its short sale constraints by decreasing search costs and lowering recall risk. This paper examines how the introduction of ETFs impacts short interest levels of their constituent stocks. We find that short selling in the underlying securities significantly increases after ETFs are introduced. The increase in short interest is largest for firms which are most short-sale constrained prior to the inclusion. The analysis of subsequent additions of stocks to ETFs reveals that the effect of increased short interest is significantly attenuated when compared to the first-time additions. Overall, our evidence suggests that the introduction of ETFs helps to alleviate short-sale constraints for stocks that they hold.

Keywords: Exchange-traded funds, short-sale constraints, short interest, securities lending

JEL Classification: G14, G23

Suggested Citation

Bansal, Naresh and McKeon, Ryan and McKeon, Ryan and Svetina, Marko, Short-Sale Constraints and Securities Lending by Exchange-Traded Funds. Managerial Finance, Vol. 39, No. 5, pp. 444 - 456 (2013) , Available at SSRN: https://ssrn.com/abstract=2173606

Naresh Bansal

Saint Louis University - Department of Finance ( email )

Richard A. Chaifetz School of Business
St. Louis, MO 63108
United States
314-977-7204 (Phone)

Ryan McKeon

University of San Diego ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

In-the-Money Options Trading ( email )

5535 1st Ave E
Apt. 104
Bradenton, FL 34208
United States

Marko Svetina (Contact Author)

University of San Diego ( email )

School of Business Administration
5998 Alcalá Park
San Diego, CA 92110
United States
(619) 260-4869 (Phone)
(619) 260-4891 (Fax)

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