Abstract
Stock lending markets are unique because stock buyers become potential stock lenders. During periods of high short demand, loan supply should expand as some new buyers of loaned shares lend them. Using instrumental variables, we find instead that loan supply contracts: during times of high short demand, the marginal buyer lends stock at a lower rate than the average seller. We find that this puzzling result is concentrated among closely held stocks with high disagreement among investors, high price impact measures, and lottery-like returns. Thus, non-lending buyers may believe that withholding shares from short sellers could enhance their expected returns.
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