Equity lender base and limits to arbitrage: Position-level evidence from mutual funds

Abstract

We provide the first comprehensive analysis on equity lender base utilizing newly available fund-stock level lending data. We find that short sellers predominantly borrow from a small set of repeated lenders whose composition differs across stocks. We argue that this lender base structure indicates inelastic lending supply, which limits arbitrage. When existing lenders exit, short sellers struggle to find replacement lenders, even though conventional lending supply measures appear slack. Consequently, lending fees surge, exacerbating mispricing in the equity market. Ex ante, risks implied by lender concentration are priced. Our results suggest that lending-side frictions are an important source of market inefficiency.

Presented by Qifei Zhu.