Stocks are Special Too: An Analysis of the Equity Lending Market

By Christopher C. Géczy, David K. Musto, Adam V. Reed. 2002

490 citations recorded by the source corpus.

With a year of equity loans by a major lender, we measure the effect of actual short-selling costs and constraints on trading strategies that involve short-selling. We find the loans of initial public offering (IPOs), DotCom, large-cap, growth and low-momentum stocks to be cheap relative to the strategies’ documented profits and that investors who can short only stocks that are cheap and easy to borrow can enjoy at least some of the profits of unconstrained investors. Most IPOs are loaned on their first settlement days and throughout their first months, and the underperformance around lockup expiration is significant even for the IPOs that are cheap and easy to borrow. The effect of short-selling frictions appears strongest in merger arbitrage. Acquirers’ stock is expensive to borrow, especially when the acquirer is small, though the major influence on trading profits is not through expense but availability.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/7ed1732366773fddbaf86b8e60509b0e888e6d8c

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Citations in the corpus

Asset Price Dynamics with Slow-Moving Capital (2010, background): “Lending fees are sometimes large, as documented by D’Avolio (2002) and Geczy, Musto, and Reed (2002).”
Which Shorts Are Informed (2008, unknown): “The clearest pecuniary cost is associated with the rebate rate, which has been studied by D’Avolio (2002), Geczy, Musto, and Reed (2002), Jones and Lamont (2002), Ofek and Whitelaw (2003), Ofek, Richardson, and Whitelaw (2004), and Cohen, Diether, and Malloy (2005).”
Allocation of initial public offerings and flipping activity (2003, unknown): “Geczy et al. (2002) discuss in detail the equity lending market in IPOs and document significant short selling activities in the first few days of trading.”
Securities lending, shorting, and pricing (2002, unknown): “Only 1% of the security loans by a custodian bank appearing in the database analyzed by Geczy, Musto, and Reed (2001) were of this type.”
An Analysis of Covariance Risk and Pricing Anomalies (2003, background): “This is a realistic assumption since many money managers are either constrained from taking, or are unwilling to take, short positions, and many other investors find shorting to be too costly, cannot borrow the stock, or are simply unwilling to short [see D’Avolio (2001) and Geczy, Musto, and Reed ”
Investor Sentiment and the Mean-Variance Relation (2011, background): “High costs to sell short reduce the profits of arbitrage strategies and, in some cases, cause them to become completely unprofitable (Geczy, Musto, and Reed (2002), Jones and Lamont (2002), Duffie, Garleanu, and Pedersen (2002)). documented that stock returns show negative skewness.”
Role of Speculative Short Sales in Price Formation: The Case of the Weekend Effect (2003, unknown): “Third, IPOs are popular among short sellers according to Geczy et al. (2002). Since IPO shares are not actually issued to the buyers until 3 to 4 days after the IPO date, short selling cannot begin until that time.”
The Good News in Short Interest (2010, background): “Other studies such as D’Avolio (2002), Cohen, Diether, and Malloy (2007), and Geczy, Musto, and Reed (2002) study proprietary data on rebate rates.”
Go Down Fighting: Short Sellers vs. Firms (2012, background): “Recent articles examine the market for borrowing stocks (D'Avolio 2002; Geczy, Musto, and Reed 2002; Mitchell, Pulvino, and Stafford 2002; Ofek and Richardson 2003; Reed 2007; Cohen, Diether, and Malloy 2007), unfortunately using sample periods of short duration.”
The market for borrowing stock (2002, unknown): “Geczy et al. (2002) use one year of data (November 1998 through October 1999) from a U.S.”