Abstract
This paper examines the equity loan supply for short selling. Using detailed stock lending data, we show that active equity funds, on average, are informed lenders. The stocks they lend outperform those that they do not. The stocks they recall and sell perform worse in the future than those that remain on loan. These funds avoid lending stocks when lending fees are extremely high and use the shorting market’s signals to form stock-selling decisions. Their behavior contrasts sharply with that of passive index funds. We argue this heterogeneity in informed lending is a previously undocumented source of short-sale constraints.
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