Securities Lending and Information Acquisition

We show that mutual funds make portfolio allocation decisions conditional on information acquired from participating in the equity lending market. Using unique data from German mutual, we show that funds that lend shares to short sellers are more likely to exit positions relative both to stocks that they do not lend and to funds that do not lend. Lenders avoid losses by better timing the closure of long positions than for stocks they do not lend. Finally, we show information acquisition in the lending market allows lenders to front-run public disclosure of large short positions.

April 2021