Short-Selling Restrictions and Returns: A Natural Experiment

Abstract

We show that increases in stock loan fees have strong causal impact on stock prices. We identify these effects by exploiting exogenous variation in loan fees generated by a tax arbitrage opportunity that existed in Brazil from 1995-2014. The tax arbitrage involved differential tax treatment on dividend payments depending on investor's type. Our data set allows to distinguish between equity lending transactions motivated by tax-arbitrage from those with the purpose of short-selling the stock. Variation in loan fees on tax-motivated transactions were a source of repeated exogenous variation of borrowing fees in short-selling transactions.