Pedro Saffi – Price Efficiency and Securities Lending

This is the second in our three part installment looking at academic research into short selling activity. If you were stranded on a desert island with a regulator and a trustee of a large pension fund and were only allowed to refer to one piece of research, this would be it. Pedro Saffi and Kari Sigurdsson wrote the original and best summary of why securities lending is good for stock markets, using Data Explorers data. If you want to substantiate phrases like “short selling is good for price discovery,” this research paper shows how and why this is the case.

• Most academic research uses securities lending data to help understand the role of short sellers and whether or not they are informed.
• This paper instead focuses on stock lending to demonstrate how shares that are difficult to borrow tend to be slower to react to news that affects their future profitability. This is a powerful defense for short selling and securities lending.
• It also describes the typical volume of securities lending in different countries and across different market cap sizes.
• Finally, the report found no evidence that short selling makes market crises more likely to occur.

Click here to download the Pedro Saffi and Kari Sigurdsson research paper: Price Efficiency and Securities Lending.

In addition, Pedro Saffi’s paper: Does Proxy Voting Affect the Supply and/or Demand for Securities Lending? concludes that if you are a hedge fund and need to borrow shares, it pays to look at the institutional ownership concentration. My video interview with Pedro on this paper can be found here.

Both papers along with the full Data Explorers archive of research into short selling can be accessed at: www.dataexplorers.com/research.