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.

Authors

Joseph Engelberg, University of California
Richard B. Evans, University of Virginia
Gregory Laonard, University of North Carolina
Adam V. Reed, University of North Carolina
Matthew C. Ringgenberg, University of Utah