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Passive ownership and short selling

Author

Listed:
  • Bastian von Beschwitz
  • Pekka Honkanen
  • Daniel Schmidt

Abstract

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. The utilization ratio—that is, the ratio of short interest over lendable supply—goes up, implying that shorting demand increases more than lendable supply. We argue that this additional demand results from an increase in the quality of lendable supply as passive funds are less likely to recall stock loans. This higher supply quality attracts informed short sellers, who improve the information efficiency around negative news releases and correct overpricing.

Suggested Citation

  • Bastian von Beschwitz & Pekka Honkanen & Daniel Schmidt, 2025. "Passive ownership and short selling," Review of Finance, European Finance Association, vol. 29(4), pages 1137-1188.
    • Handle: RePEc:oup:revfin:v:29:y:2025:i:4:p:1137-1188.
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    File URL: http://hdl.handle.net/10.1093/rof/rfaf023
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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