Abstract: We develop a dynamic model to study how the securities lending market affects the trading and pricing of a stock around the arrival of public information. When investors disagree about the firm's value but agree about how to interpret a public news event given this value, loan fees rise before and fall after the event in proportion to its informativeness. The news reduces the expected stock price after its release when the demand for shorting is high, but has no impact on the pre-announcement price. If little information is expected to arrive, the price can be significantly inflated even when the loan fee is low. When investors disagree more about the news than about firm value, only investors with extreme beliefs take positions before the announcement and the news increases firms' ex-ante valuations by encouraging trade.
Discussant: Nicolae Gârleanu, Washington University-St. Louis
