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Short‐sale constraints and securities lending by exchange‐traded funds

Naresh Bansal (Finance Department, Saint Louis University, Saint Louis, Missouri, USA)
Ryan McKeon (Finance Department, University of San Diego, San Diego, California, USA)
Marko Svetina (Finance Department, University of San Diego, San Diego, California, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 12 April 2013

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Abstract

Purpose

The purpose of this paper is to investigate the extent to which introduction of ETFs reduces short‐sale constraints in their constituent stocks.

Design/methodology/approach

First, the introduction of ETFs increases short interest for stocks that they hold. Second, the increase in short interest is highest for the stocks that were most short‐sale constrained. Third, subsequent additions of a stock to an ETF will have a lesser impact on short interest than the first time additions. Finally, using matched control sample and regression analysis approaches, the authors make sure that their results are robust to determinants of short‐selling activity which extant research has found to be relevant.

Findings

When a stock is included in an ETF for the first time, the paper finds that the average monthly short‐selling activity of the stock in the six months following ETF‐inclusion is, on average, 33 percent higher than that in six months prior to the inclusion. This effect is the strongest for stocks that are most short‐sale constrained. The analysis of subsequent additions of stocks to ETFs reveals that the effect of increased short‐selling activity is significantly attenuated when compared to the first‐time additions. All of the findings are robust to the matched sample comparisons and multiple regression analysis that account for determinants of short‐selling activity.

Originality/value

This paper shows that: the introduction of ETFs helps relax short‐sale constraints in the market; that the extent to which a stock's outstanding shares are held by one or more ETFs serves as a proxy for the degree to which stocks are short‐sale constrained; and implies that the introduction of ETFs makes the prices of the funds' underlying securities more efficient.

Keywords

Citation

Bansal, N., McKeon, R. and Svetina, M. (2013), "Short‐sale constraints and securities lending by exchange‐traded funds", Managerial Finance, Vol. 39 No. 5, pp. 444-456. https://doi.org/10.1108/03074351311313843

Publisher

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Emerald Group Publishing Limited

Copyright © 2013, Emerald Group Publishing Limited

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