Strategic Behavior By Equity Lenders

61 Pages Posted: 20 May 2017 Last revised: 27 Nov 2023

See all articles by Brian J. Henderson

Brian J. Henderson

George Washington University - Department of Finance

Gergana Jostova

George Washington University - Department of Finance

Alexander Philipov

George Mason University - Department of Finance

Date Written: October 6, 2023

Abstract

We document that stock lenders are informed about market conditions and pursue revenue
maximization by setting premiums or offering discounts on stock lending fees. Using a model
of supply and demand in the equity lending market, we illustrate the effect of stock borrowers'
private information on the elasticity of shorting demand. Smart lenders respond to demand
elasticity and increase their revenues through premiums or discounts on lending fees. Empirically, decomposing stock loan fees into intrinsic fee and premium or discount, we con firm lenders' market awareness, showing that premiums and discounts among difficult-to-borrow stocks both lead to increased lending revenues. This smart lending behavior has new implications about informed shorting, short interest, and transaction costs in the equity lending market.

Keywords: short sales, lending fees, private information, equity mispricing, market frictions

JEL Classification: G11, G12, G14

Suggested Citation

Henderson, Brian Joseph and Jostova, Gergana and Philipov, Alexander, Strategic Behavior By Equity Lenders (October 6, 2023). Available at SSRN: https://ssrn.com/abstract=2971096 or http://dx.doi.org/10.2139/ssrn.2971096

Brian Joseph Henderson

George Washington University - Department of Finance ( email )

Department of Finance, Funger Hall
2201 G Street, NW
Washington, DC 20052
United States
202-994-3669 (Phone)

Gergana Jostova (Contact Author)

George Washington University - Department of Finance ( email )

2201 G St NW
Funger Hall, Suite 501
Washington, DC 20052
United States
202-994-7478 (Phone)

HOME PAGE: http://business.gwu.edu/gergana-jostova

Alexander Philipov

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

HOME PAGE: http://mason.gmu.edu/~aphilipo

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