“Passive Ownership and the Securities Lending Market” by Dr. Daniel Schmidt
Dr. Daniel Schmidt
Associate Professor of Finance
HEC School of Management
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. Interestingly, the utilization ratio—i.e., the ratio of short interest over lendable supply—tends to go up, implying that shorting demand increases by more than what can be justified by a pure surge in lendable supply. We argue that this additional shorting demand results from an increase in the quality of lending supply as passive funds are less likely to recall stock loans. We show that, in line with this argument, the average maturity of stock loans increases and the likelihood of delivery failures decreases with higher passive ownership. Finally, we document that the additional shorting activity promoted by passive ownership improves information efficiency.