Passive Ownership and Short Selling

Pekka Honkanen (), Daniel Schmidt () and Bastian von Beschwitz
Additional contact information
Pekka Honkanen: https://www.terry.uga.edu/directory/people/pekka-honkanen
Bastian von Beschwitz: https://www.federalreserve.gov/econres/bastian-von-beschwitz.htm

No 1365, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We exploit quasi-exogenous variation in passive ownership around the Russell 1000/2000 cutoff to explore the causal effects of passive ownership on the securities lending market. We find that passive ownership causes an increase in lendable supply and short interest, while lending fees remain largely unchanged. The utilization ratio—i.e., the ratio of short interest over lendable supply—goes up, implying that shorting demand increases more than lendable supply. We argue that this additional demand results from an increase in the quality of lendable supply as passive funds are less likely to recall stock loans. Finally, we document that passive ownership-induced short selling improves information efficiency around negative earnings news.

Keywords: short selling; securities lending; etfs (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G15 (search for similar items in EconPapers)
Date: 2022-12
New Economics Papers: this item is included in nep-des
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1365

DOI: 10.17016/IFDP.2022.1365

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