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Short-Selling Restrictions and Returns: a Natural Experiment

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We estimate the causal impact of short-selling restrictions on stock returns. We take advantage of a unique dataset and exploit a source of exogenous variation in loan fees provided by a tax-arbitrage opportunity that existed in Brazil from 1995-2014. The tax-arbitrage opportunity stemmed from the fact that domestic investment funds were exempted from income taxes on dividends received by stocks they borrowed, whereas the original owner would be taxed if she did not lend out the stock. Because we observe all equity loan transactions, including the investor type, we can distinguish between equity lending transactions motivated by tax-arbitrage from those with the purpose of short-selling the stock. Variation in loan fees on tax-motivated transactions are a source of exogenous variation in borrowing fees in short-selling transactions, which allows us to estimate the causal impact of the loan fees on stock prices. We find that increases in stock loan fees have strong impact on stock prices.

This talk is part of the Cambridge Finance Workshop Series series.

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