Journal of Financial Economics 66 (2002) 271–306

The market for borrowing stock

Gene D’Avolion

Graduate School of Business Administration, Harvard University, Morgan 480, Soldiers Field Boston,MA 02163, USA

Received 12 June 2001; accepted 21 March 2002

Abstract

To short a stock, an arbitrageur must first borrow it. This paper describes the market for borrowing and lending U.S. equities, emphasizing the conditions generating and sustaining short-sale constraints. A large institutional lending intermediary provided eighteen months (4/2000–9/2001) of data on loan supply (‘‘shortability’’), loan fees (‘‘specialness’’), and loan recalls. The data suggest that while loan market specials and recalls are rare on average, the incidence of these short-sale constraints is increasing in the divergence of opinion among investors. Beyond some threshold, investor optimism itself can limit arbitrage via the loan market mechanism.