The Effects of Stock Lending on Security Prices

October 01, 2013
  • Contributors:

    Steven N. Kaplan, Tobias Moskowitz, Berk A. Sensoy
  • Topic:

    Equities, Other Research

The Journal of Finance

The impact of short selling is the subject of an ongoing debate among academics, investment committees, corporate boards, and regulators. One view is that short selling helps make markets more efficient by improving price discovery. An alternative view is that short selling distorts markets and adversely affects prices moving them further away from fundamentals. Indeed, short-sellers have often been characterized as immoral, unethical and unpatriotic.

Interest in the effects of short selling has intensified with the sharp drop in asset prices, particularly those of financial institutions, during the mortgage crisis, sparking new discussions of the consequences of short selling among policy makers worldwide.

In this paper, we randomly move the supply of shares available for lending, thereby exogenously shifting the supply of lendable assets. Working with a sizeable (greater than $15 billion in assets), anonymous money manager (“the Manager”), we randomly make available for lending two-thirds of the high-loan-fee stocks in the Manager’s portfolio and withhold a characteristic-matched random sample of the other third. Our experiment compares stocks randomly made available for lending to those randomly withheld from lending to identify shocks to supply holding demand and other factors constant.

We find that average loan fees decline significantly (on the order of 2% to 3%) for the stocks that experience supply increases relative to those that do not. We do not find any adverse effects on stock prices from loan supply shocks. Similarly, during the recall period, returns to recalled stocks are not greater than returns to stocks withheld from lending.

Roger F. Murray Prize First Place 2010



  • AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which AQR.com has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.

  • The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees.

    This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.