The Loan Fee Anomaly: A Short Seller’s Best Ideas

Posted: 3 Nov 2020 | Last revised: 21 Mar 2023

Joseph Engelberg
University of California, San Diego (UCSD) – Rady School of Management

Richard B. Evans
University of Virginia – Darden School of Business

Gregory Leonard
University of North Carolina at Chapel Hill

Adam V. Reed
University of North Carolina Kenan-Flagler Business School

Matthew C. Ringgenberg
University of Utah – Department of Finance

Abstract

We find that equity loan fees are the best predictor of cross-sectional returns. When compared to 102 other anomalies, the loan fee anomaly has the highest monthly long-short return (1.17%), has the highest monthly Sharpe Ratio (0.40), and unlike other anomalies, exhibits strong persistence throughout the sample. We show that 28% of the loan fee anomaly can be explained by its selective exposure to the best performing anomalies, while 72% is due to unique information possessed by short sellers. Our results show that short sellers’ willingness to pay prices the cross-section of stocks and these “best ideas” outperform other anomalies.

 

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