Active and Passive Owners: Lending, Asset Prices, and Corporate Policy
Paper Session
Sunday, Jan. 4, 2026 2:30 PM - 4:30 PM (EST)
- Vikas Agarwal, Georgia State University
ETF Loan Market: Causes and Consequences of High ETFs Lending Fees
Abstract
We find that exchange-traded fund (ETF) lending fees are significantly higher than individual stocks. Although the create-to-lend (CTL) mechanism helps alleviate supply constraints when borrowing demand rises, its effectiveness is hampered by various costs and frictions, including the lack of competition among authorized participants (APs), hedging challenges inherent to the CTL process, and the costs and frictions associated with creating ETFs. These limitations contribute to elevated ETF lending fees (i.e., outside lending) and notably impact the stock lending market (i.e., inside lending). Specifically, increased short selling through cheaper-to-borrow ETFs can exert downward pressure on stock lending fees. Our findings highlight the constraints on arbitrage opportunities present within ETF markets.Delegated Leverage and Asset Prices: Evidence from the Hedge Fund Industry
Abstract
Contrary to the conventional wisdom that less constrained investors achieve superior returns, existing studies find little evidence that the use of leverage enhances hedge fund performance. To reconcile this puzzle, we extend the model of Berk and Green (2004) and empirically test its predictions including 1) Hedge funds reap leverage-based economic rents via fees; 2) Adverse conditions prompt funds to simultaneously reduce leverage and increase holding betas; and 3) A hedge fund leverage tightness factor predicts asset returns, especially during periods with reduced hedge fund leverage. Our results provide a leverage-based framework for hedge funds with important asset pricing implications.The ETF Tax Advantage and Firm Payout Policy
Abstract
This study investigates the impact of the ETF tax advantage on firm payout policy. Compared to traditional mutual funds, ETFs have a unique ability to shield their investors from paying taxes on capital gains distributions, but this advantage does not extend to dividend payouts. Consequently, we hypothesize that ETFs discourage portfolio firms from paying dividends to provide higher after-tax returns for their investors and thereby gain market share. Consistent with our prediction, we find a robust negative relation between ETF ownership and dividend payouts. Cross-sectionally, we find the effect is stronger for ETFs with a greater capacity to mitigate investors’ capital gains taxes via “heartbeat” trades and those with a greater incentive to cater to tax-sensitive institutional clients. Evidence from tests using plausibly exogenous variation in tax-advantaged ownership indicates the relation is causal. Moreover, we find that firms with high ETF ownership substitute repurchases for dividends as an alternative payout method that preserves’ ETFs’ tax advantage. Overall, our findings suggest that the unique tax structure of ETFs, combined with their increasing prevalence, meaningfully influences corporate policy.Discussant(s)
Lukas Schmid
,
University of Southern California
Rabih Moussawi
,
Villanova University
Stanislav Sokolinski
,
Michigan State University
Ian Appel
,
University of Virginia
JEL Classifications
- G1 - General Financial Markets