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Dr. Qifei Zhu
Assistant Professor in Finance
Nanyang Business School
Nanyang Technological University

Using newly available data on mutual funds’ equity lending at the position level, we find a striking pattern that equity lending is persistent: for the same stock, a past lender fund is an order of magnitude more likely to continue lending shares compared to owner funds that did not lend. Effectively, a stock’s shares on loan are supplied by  a small number of investors, and conventional lending supply measures under-estimate actual short-sale constraints. When existing lenders sell their shares, short sellers are squeezed and lending fees spike, even though lenders’ selling is motivated by non-informational considerations. After lenders exit, stock prices become less efficient and more likely to be overpriced.