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. This higher supply quality attracts informed short sellers, who improve the information efficiency around negative news releases and correct overpricing.
We exploit detailed transaction and position data for a sample of long-short equity hedge funds to study the trading activity of fundamental investors. We find that hedge funds exhibit skill in opening positions, but that they close their positions too early, thereby forgoing about one-third of the trades’ potential profitability. We explain this behavior with the limits of arbitrage: hedge funds close positions early in order to reallocate their capital to more profitable investments and/or to accommodate tightened financial constraints. Consistent with this view, we document that hedge funds leave more money on the table after opening new positions, negative returns, or increases in funding constraints and volatility.
We investigate whether providers of news analytics affect the stock market. We exploit a unique identification strategy based on inaccurate news analytics that were released to the market. We document a causal effect of news analytics on the market, irrespective of the informational content of the news. Coverage in news analytics speeds up the market reaction in terms of stock price response and trading volume, but temporarily increases illiquidity and can result in temporary price distortions that might increase volatility and reduce market stability. Furthermore, we document that traders learn dynamically about the precision of news analytics.
We investigate whether short sellers are subject to the disposition effect and whether this behavior affects stock prices. Consistent with the disposition effect, short sellers are more likely to close positions with higher their capital gains and this behavior is associated with lower profitability. Furthermore, stocks with high short sale capital gains experience negative returns, suggesting that short sellers' disposition bias affects stock prices, consistent with the model of Grinblatt and Han (2005). A trading strategy based on this finding achieves significant alphas. Overall, short sellers' behavioral biases limit their ability to arbitrage away mispricing caused by other traders' disposition effect.
This article studies the effect of cash windfalls on the acquisition policy of companies. As identification I use a German tax reform that permitted firms to sell their equity stakes tax-free. Companies that could realize a cash windfall by selling equity stakes see an increase in the probability of acquiring another company by 19 percent. I find that these additional acquisitions destroy firm value. Following the tax reform, affected firms experience a decrease of 1.2 percentage points in acquisition announcement returns. These effects are stronger for larger cash windfalls. My findings are consistent with the free cash flow theory.
Several papers find a positive association between a bank's equity stake in a borrowing firm and lending to that firm. While such a positive cross-sectional correlation may be due to equity stakes benefiting lending, it may also be driven by endogeneity. To distinguish the two, we study a German tax reform that permitted banks to sell their equity stakes tax-free. After the reform, many banks sold their equity stakes, but did not reduce lending to the firms. Thus, our findings suggest that the prior evidence cannot be interpreted causally and that banks' equity stakes are immaterial for their lending.
Short sellers trade more on days with qualitative news, that is, news containing fewer numbers. We show that this behavior is not informationally motivated but can be explained by short sellers exploiting higher liquidity on such days. We document that liquidity and noise trading increase in the presence of qualitative news, enabling short sellers to better disguise their informed trades. Natural experiments support our findings. Qualitative news has a bigger effect on short sellers' trading after a decrease in liquidity following the stock's deletion from Standard & Poor's 500 and a smaller effect when investor attention is distracted by Olympic Games.
Securities lending against cash collateral provides the borrower with the security and the lender with cash financing, thus being economically equivalent to repo. When repo rates spiked unexpectedly by over 300 basis points in September 2019, the value of cash financing increased significantly overnight, leading to a windfall gain. We find that securities lenders passed this windfall on to borrowers of government bonds but not to borrowers of equity or corporate bonds. We hypothesize that this is due to the lower negotiation power of equity and corporate bond borrowers, who usually have an interest in obtaining the specific security. Consistent with this idea, we find that government bond lenders didn’t pass on the windfall if the ex-ante lending fee was high.
We compare how bond market access affects firms' investment decisions in the United States and the euro area. Having a bond rating enables US corporations to invest more and undertake more acquisitions. In contrast, in the euro area, bond ratings have no effect on investment decisions. Similarly, firms with bond ratings have higher leverage in the United States, but not in the euro area. This difference may be due to euro-area firms getting sufficient financing from banks. Consistent with this explanation, euro-area bond ratings became more relevant for investment after the banking crisis of 2008, when banks reduced their lending to firms.