Abstract

We document that there is commonality in the loan fees that short sellers pay, and the common component of loan fees explains a significant amount of loan fee variation. While the top principal component of stock returns only explains 28.3% of their variation, we find that the top principal component of loan fees explains 45.6% of their variation. The time series of the loan fee common component is highly correlated with several well-documented asset pricing and macro factors, suggesting that loan fee commonality is associated with states of the world that are consequential to investors. At the asset level, we compute sensitivities of stocks’ loan fees to the loan fee common component and document that stocks with high loan fees tend to also exhibit high sensitivity to the loan fee common component. While controlling for other priced short-selling factors, we document a statistically significant negative relationship between the systematic volatility of loan fees (with respect to the loan fee common component) and stock returns, indicating that this commonality is priced in the cross-section of stock returns. In addition to this pricing implication, we present evidence that loan fee commonality is associated with lower price efficiency, suggesting that loan fee commonality is an important limit to arbitrage. Finally, we present evidence that loan demand may be the primary driver of the observed fee commonality.

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• Keyword(s):
• finance 247

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