Institutional Investors in the Equity Lending Market:

Implications for Corporate Cash*

Murillo Campello Pedro A. C. Saffi

Cornell University & NBER University of Cambridge
campello@cornell.edu psaffi@jbs.cam.ac.uk

[Preliminary and Incomplete: PLEASE DO NOT CIRCULATE ]

This Draft: February 18, 2015

Abstract

The precipitous growth of institutional investing has changed the makeup of equity ownership and
trading. The search for yield prompts institutional investors to place their holdings in the equity
lending market, making them the largest suppliers of stocks for shorting. This paper examines cor-
porate policy responses to shifts in the supply of lendable shares. It does so using quasi-experimental
methods that build on the framework of institutional investing. We show that companies save more
cash and repurchase more stocks when institutional investors make more of their stocks available for
shorting. The economic magnitudes involved are significant. These effects are particularly stronger
among financially constrained firms. The study sheds new light onto how the evolving nature of
capital market institutions shapes the liquidity needs of firms.

Key words: Cash holdings, equity lending, short sales constraints, passive ownership, instrumental
variables, regression discontinuity design.
JEL classification: G21, G10.

*We thank Reena Aggarwal for the governance index data and Brian Bushee for the quasi-indexers classifica-
tion. We also thank comments by Bart Lambrecht, Eva Steiner, and Jason Sturgess. We are responsible for
any remaining errors.
1 Introduction
It is based on stock prices that corporate managers calculate their companies’ cost of capital,
plan merger deals, establish goals for payout policies, and even design compensation packages.
Not surprisingly, managers dislike events that depress their companies’ stock or add volatility
to the price formation process. Indeed, the vast majority of managers say they initiate stock
repurchase programs when prices move below fundamentals (Brav et al. (2008)) and empiri-
cal evidence suggests that firms that repurchase their stocks are successful in reducing price
volatility (Hong et al. (2008)). Presumably, these policies are ultimately born out of active
liquidity management; in particular, they may shape firms’ savings.
While managers cannot control stock prices, they have some degree of influence over the
trading of their companies’ stock. Similar to central bankers attempting to control currencies,
company managers have near-monopoly powers when supplying fresh stocks into the market.
Moreover, managers are often the largest purchasers of their companies’ stocks. Yet, their
influence over the firms’ stock float is limited. In particular, managers’ ability to influence
prices depends on the existing pool of “lendable stocks;” i.e., how many shares are available
in the equity lending market. Ownership-like interests in these stocks can be taken upon by
speculators and other traders, allowing for strategies such as shorting.1 While the institutional
framework regulating shorting has remained relatively constant over the years, the supply
of lendable stocks has increased in tandem with the unprecedented growth of institutional
investment (Lewellen (2011)).
This paper examines the impact of equity lending on corporate financial policies. It does so
by exploiting changes in the market for stock lending triggered by trends and ad hoc practices
in institutional investing. Theory suggests that price manipulation by speculators can lead to
sudden distortions in the efficient allocation of corporate resources (Goldstein and Guembel
(2008)). Companies’ ability to stop speculators from manipulating stock prices is, nonetheless,
limited by the availability of stocks that can be shorted. We investigate the hypothesis that
when short sellers are able to tap into larger pools of lendable stocks, firms may respond by
changing their savings and issuance policies — where those policy changes should occur in tan-
dem so as to achieve the same objective. Focusing first on cash policies, we show how corporate
1
Short selling accounts for almost a quarter of all trading in U.S. stock markets (Diether et al. (2009)).

1
savings increase when there is more lendable stocks available for shorting. The relation between
shortable stocks and cash savings is economically strong and appears to be causal. To shore
up our proposed interpretation, we use both an instrumental variables (IV) approach based on
passive institutional ownership and regression discontinuity design-based tests (RDD) using
Russell Index reconstitutions. As we explain in detail, these tests are informed and guided by
the unique institutional set we consider, where well identified shifts in institutional ownership
generate pronounced changes in the supply of lendable stocks.
We start our investigation with standard models of the determinants of cash policies. Our
tests follow the cash literature and we consider both a firm’s “total cash” (e.g., Opler et al.
(1999)) as well as its “excess cash” (cf. Pinkowitz et al. (2013)). In a baseline estimation, we
add measures of the supply of lendable stocks to a parsimonious cash policy model (Almeida
et al. (2004)). We then extend the model with the broader set of controls used in the litera-
ture (e.g., Bates et al. (2009)). In every estimation, we find a positive, statistically significant
coefficient for our proxies for the supply of lendable stocks. Our most conservative estimate in
this set of tests suggests that a one-interquartile range (IQR) increase in a company’s “total
supply” of lendable stock is associated with a 1.3% increase in cash holdings in the subsequent
quarter, which is about 6% of the sample cash holding median. We repeat each of those esti-
mations considering the “net supply” of lendable stocks (total lendable supply minus lent out
stocks) to account for the fact that a significant fraction of a firm’s lendable stocks are already
committed at each point in time and may not be available for shorting. Focusing on just this
slack supply, we still find a very strong relation between the supply of lendable stocks and
corporate cash holdings.
To better understand the direction of causality in our results, we consider tests that exploit
the institutional setting in which our examination takes place. The growth of institutional
ownership — in particular index funds and ETFs — and the more intensive use of trading
strategies that rely on short selling are responsible for the emergence of an active equity lending
market. The average institutional ownership of public companies in the United States grew
from 40% in 1995 to over 70% in 2012. As of December 2012, out of the $11 trillion stock market
capitalization, $2.6 trillion were from stocks available for borrowing. These numbers contrast
sharply with figures from previous years, with the supply of lendable stocks growing by over 10-

2
fold in less than a decade.2 One notable phenomenon that accompanies this trend in lendable
supply is the growth of passive investors in stocks — a phenomenon largely attributed to index
fund investing. Index funds have little interest on any individual firm’s long-term prospects
and are only concerned about the firm performance for as long as it belongs to the fund’s
benchmark portfolio. Indeed, index funds focus primarily in minimizing short-term “tracking
errors” (He and Xiong (2013)). They operate high equity volumes and often buy large amounts
of stocks in the firms they target. One important aspect of passive investing is concerning from
firms’ perspective, nonetheless. To wit, in order to lower their investment costs and improve
performance, index funds actively lend the stocks they own to other investors; primarily to
investors interested in implementing short sales strategies (see Evans et al. (2014)).
Passive investors’ portfolio choices follow style and diversification strategies that are un-
likely to be influenced by factors confounded with potential drivers of corporate cash policies
(e.g., active monitoring and disciplining). We use information on these funds’ investments to
identify the link between the supply of lendable stock and corporate savings choices. For each
firm in our sample, we gather data on institutional holdings from their 13f filings and use
Bushee’s (2001) classification of “Quasi-Indexers” to compute a proxy of passive ownership.
We use this measure as an instrument for the supply of lendable stocks in cash models.3 In
this way, we pinpoint the effect of the supply of lendable stocks on cash policies that are driven
exclusively by passive-type investors. Our IV estimates confirm our prior results and point to
an even stronger link between the supply of lendable stocks and firms’ demand for cash.
The empirical setting we explore is particularly rich and allows us to consider additional
strategies to identify causal relations between the supply of lendable stocks and corporate cash.
Because the composition of indices followed by quasi-index investors change discretely on a
regular basis, we can use index reconstitutions as surrogates for “local shifts” in the supply
of lendable stocks. To wit, as firms are dropped and included in different indices, passive
index funds are forced to reshuffle their investment in firms affected by index reconstitution.
As the investment portfolio of those funds change, so does the supply of lendable stocks of
2
A S&P–Capital IQ report shows estimates of the supply of shares available to lend in the US between
2004 and 2011. The report is available at http://www.spcapitaliq.com/our-thinking/resources-ideas/
Exploring%20Alpha%20from%20the%20Securities%20Lending%20Market.pdf
3
Bushee (2001) classify institutional investors in three groups based on factor analysis: “Transient” insti-
tutions have high turnover and use momentum strategies; “Dedicated” have concentrated holdings and low
turnover; “Quasi-Indexers” have low turnover, high portfolio diversification, and follow contrarian strategies.

3
the firms affected. In this setting, we focus on the annual reconstitutions of the Russell 1000
and Russell 2000 indices, whose membership are composed of firms ranked according to their
market capitalization. The indices are value-weighted so that stocks at the top of one index
receive heavy index buying, whereas stocks at the bottom receive close to none. The important
observation is that the demand for stocks by passive index funds affects firms of very similar
size that happen to be on different sides of an arbitrary index cutoff.
The transition across the Russell 1000 and Russell 2000 indices allows for a “double-sided”
approach in identifying increases and decreases in the supply of lendable stocks. As firms on
the margin of the capitalization ranking cut-off switch from the very bottom of the Russell 1000
index to the very top of the Russell 2000 index, index investors need to acquire large amounts
of those firms stocks to adjust their portfolios. As they do so, they make those stocks available
for lending. On the flip side, analogous dynamics occur when a stock moves from the top of
the Russell 2000 index to the bottom of the Russell 1000 index. This change leads to a sharp
decline in ownership by index investors; hence, to a decline in the supply of lendable stocks. To
the extent that index switching in a narrow bandwidth around the Russell 1000–Russell 2000
cut-off resembles a near-randomization process, we can use this process to capture shifts in the
supply of lendable stocks in our tests. To wit, these dynamics are outside of firm managers’
control and represent a sharp, localized shift in the supply of lendable stocks.4
We use this setup in two ways. First, we conduct a standard RDD test using changes in the
extensive and intensive margins of index membership to measure the impact of stock supply
on corporate cash. These tests show that as firms migrate from the Russell 1000 index into
the Russell 2000 index — when there is a sharp positive shock to the supply of lendable stocks
— their cash savings increase significantly in the next quarter. Moreover, the increase in cash
is a function of the importance (weight ranking) of the firm in the new index. In particular,
the lower the firm’s rank position in the new index — thus the less important it is for index
investors to buy the firm’s stock — the lower is in the increase in the firm’s cash. That our
prior results are confirmed along these pre-determined, non-linear discontinuity rules suggest
that the supply of lendable stocks in an important, identifiable driver of cash policies.
4
The strategy of considering switches across the Russell indices as near-randomizing experiments are imple-
mented by Chang et al. (2014) and Crane et al. (2014). None of those papers consider effects associated with
the supply of lendable stocks.

4
 One limitation of the use of the RDD strategy, nonetheless, is that index switching may
drive changes not only in the supply of lendable stocks, but also across other potentially rele-
vant dimensions like ownership concentration or stock liquidity. One could be concerned that
these other changes may influence the results we report. To fend against alternative expla-
nations we exploit the Russell index membership switch in a different way. In particular, we
resort to a more standard IV approach (Crane et al. (2014)). In a first-stage estimation, we
recover the change in stock supply that is directly induced by membership switching across
indices. In the second stage, we regress corporate cash on the component of supply that is
explained by membership changes across Russell indices. Our tests continue to show a strong,
positive relation between the supply of lendable stocks and corporate cash.5
The next step is to investigate the internal logic of our results. We argue that firms save
cash in response to increases in the supply of lendable stocks so they can initiate repurchase
programs if necessary. While firm cash policies may partially deter short sellers, at times,
firms will need to repurchase their stocks. We examine whether firms increase repurchases of
their own stocks when lendable supply is high and find that they actively do so. According to
estimates from our passive institutional ownership IV model, a one-IQR change in the supply
of lendable stocks increases firms’ repurchases in the next quarter by 0.4%. This is a significant
figure since most firms do not engage in repurchases programs; the sample IQR variation for
repurchases is only 0.1%.
Beyond using lendable supply measures as proxies for how easy it is to short a company’s
stocks, we also conduct our analysis based on the fees charged for borrowing those stocks. This
pricing measure is interesting as provides insights about both the supply of lendable stocks as
well as the outstanding demand for those stocks. In particular, a high fee potentially reflects
both high demand and low supply for a company’s stocks. According to our story, high-fee
firms should have lower cash balances and also engage in fewer repurchases since it is difficult
for short sellers to engage in massive selling. This is what we find in the data.
Finally, we examine whether the relation between cash savings and equity lending supply is
modulated by the degree of financial constraints faced by firms. The need to safeguard against
capital market imperfections is particularly pronounced amongst firms with credit frictions. In
5
We call this the “local” IV approach, in contrast to the “global” IV approach using the passive ownership
as an instrument described above.

5
line with the “precautionary savings” view, we find that firms that have low payout ratios, that
are small, as well as those with a high values of the Hadlock and Pierce’s (2010) SA Index (that
is, “financially constrained” firms) have much higher savings sensitivities to lendable supply.
Research on financial management proposes several motivations for firms’s demand for cash.
They run a gamut ranging from the need to minimize the impact financing constraints on in-
vestment (Almeida et al. (2004)) and growth opportunities (Opler et al. (1999)) to concerns
about cash flow risk (Bates et al. (2009)) and product market competition (Fresard (2010)).
The topics considered by this literature have evolved over time (see Almeida et al. (2014) for
a recent review). To our knowledge, however, the literature has not examined how cash can
be used as a safeguard against investors willing to sell short companies’ shares.
The remainder of the paper is organized as follows. Section 2 discusses the growth of the
equity lending market. Section 3 describes the data we use. Section 4 describes the baseline,
fixed-effects regression results for the relation between cash savings and the supply of lendable
stocks. Section 5 presents results from an instrumental variables approach that uses passive
institutional ownership as an instrument for lendable supply. Section 6 uses an alternative
estimation framework derived from rules dictating membership in the Russell Index. Section
7 discusses additional robustness tests. Section 8 concludes.

2 Institutional Investors and the Equity Lending Mar-

ket
Investors wishing to short a company’s stock are required to borrow shares in the equity
lending market. Borrowers pay a lending fee and put up a collateral (usually 102% of the posi-
tion’s size) in exchange for their desired shares. The collateral is invested by lenders, who return
a certain fraction back to borrowers (known as the rebate rate). The implied loan fee is defined
as the difference between the risk-free interest rate and the rebate rate (D’Avolio (2002)).
The equity lending market has grown tremendously in recent years, together with the in-
crease in short selling activity. Massa et al. (2014) report that the fraction of U.S. equities
available for lending has increased from 0.4% in 2002 to 19.3% in 2009. An important feature
of this trend is the increase in institutional ownership and the role institutions play in equity

6
lending. Institutions are the largest lenders of stock and they secure extra revenues by lending
out their holdings. CalPERS, for example, estimates having earned $1.2 billion in revenues
from equity lending between 2000 and 2008, equivalent to an increase in returns of more than
30 bps to the pension fund’s performance. While stock lending is widespread, it is more pro-
nounced among passive investors such as ETFs and index funds. These vehicles have become
extremely popular in recent years (Ben-David et al. (2014)) and their investment objectives
make them less interested in actively engaging with the firm. At the same time, the competitive
nature of their market is such that they are prone to lending stocks to increase returns (Evans
et al. (2014)). Indeed, they are some of the most important participants of the lending market.
Borrowers in this market are mostly investors setting up short positions, like hedge funds.6
Our data collection process and identification strategy will emphasize information that can
be gauged from the supply of lendable stocks and the type of institutional investors holding
the shares of each of the firms in our sample. We use data on the securities lending market col-
lected by Markit, estimated to represent nearly 90% of the U.S. equity lending.7 The database
contains stock-level daily information between 2006 and 2012 for the lendable supply of shares,
the amount lent out, and the average implied loan fee.
We define Supply as the value of lendable shares divided the firm’s total market capitaliza-
tion. This is our main variable of interest. We note, however, that at any given point in time
some of the firm’s lendable stock may be already committed to other borrowers and therefore
cannot be used for shorting on demand (On Loan).8 As such, we also compute a measure of
slack supply and define Net Supply as the difference between Supply and (On Loan) at the end
of each quarter. The idea behind this measure is to use the fraction of the firm still available
to borrow as a proxy to the amount of potential short selling (Fee). Fee is defined as the
annualized value-weighted average loan fee of all outstanding loans on the stock.
Figure 1 presents the time series of equity lending variables. It displays the aggregate dollar
value of lendable supply (in USD trillions) and the quarterly averages of the fraction available
to lend (Supply), the fraction of shares lent out (On Loan), and Net Supply defined as the
6
Stocks can also be borrowed for tax-arbitrage strategies or voting in shareholder meetings (see Christoffersen
et al. (2005) and Aggarwal et al. (2014)).
7
See Saffi and Sigurdsson (2011) for a detailed description.
8
On Loan is highly correlated with Short Interest, the fraction of shares held short and reported by Com-
pustat. In our sample, the correlation between these two variables equals 0.8.

7
Figure 1. Equity Lending Market Dynamics over Time

25 10

20 8

15 6

USD trillions
(% of market cap)

10 4

5 2

0 0
Dec-2006

Dec-2007

Dec-2008

Dec-2009

Dec-2010

Dec-2011

Dec-2012
Mar-2007
Jun-2007

Mar-2008
Jun-2008

Mar-2009
Jun-2009

Mar-2010
Jun-2010

Mar-2011
Jun-2011

Mar-2012
Jun-2012
Sep-2006

Sep-2007

Sep-2008

Sep-2009

Sep-2010

Sep-2011

Sep-2012
Supply (in USD trillion) Supply On Loan Net Supply

The figure shows the quarterly aggregate dollar amount available to lend (Supply (in USD trillion)),
the average number shares available to lend (Supply) as a fraction of market capitalization, the number
of shares lent out as a fraction of market capitalization (On Loan), and the difference between the
two (Net Supply) as a fraction of market capitalization.

difference between Supply and On Loan. The dollar amount of shares available for lending is
very large, averaging USD 2.26 trillion and is equivalent to 21.8% of the total market capi-
talization. Supply increases from 17.8% of market capitalization to a peak of 23.5% in June
2008, right before the Lehman Brothers bankruptcy. In September 2006, On Loan was 4.2%,
reaching a peak of 6.9% before the onset of the financial crisis. Short positions were unwound
following the crisis, and by December 2012 On Loan was down to 3.5%. This increase implies
that there are more shares available to lend, which lowers borrowing costs and increases the
threat of short selling.
The largest driver of equity lending is institutional ownership (e.g. D’Avolio (2002) and
Saffi and Sigurdsson (2011)). Figure 2 depicts the growth in institutional ownership in recent

8
Figure 2. Institutional Ownership over Time

70

60

50

40
(% of market cap)

30

20

10

0
Mar-2002

Mar-2003

Mar-2004

Mar-2005

Mar-2006

Mar-2007

Mar-2008

Mar-2009

Mar-2010

Mar-2011

Mar-2012
Sep-2002

Sep-2003

Sep-2004

Sep-2005

Sep-2006

Sep-2007

Sep-2008

Sep-2009

Sep-2010

Sep-2011

Sep-2012
Total IO Passive IO

The figure shows total institutional ownership (Total IO) reported in SEC’s 13F filings as a fraction
of market capitalization, and the ownership held by “quasi-indexers” mutual funds (Passive IO) as
defined in Bushee’s (2001).

years, a growths that maps into the increase in lendable supply observed in Figure 1. In
January 2002, approximately 43% of market capitalization was held by institutions and that
continued to rise until June 2008 to 65% of market capitalization. This figure declined after
the Lehman Brothers’ bankruptcy and stabilized around 60%. Ownership by “Quasi-Indexers”
funds (our measure of passive ownership) represents 63% of total institutional ownership. In
December 2012, quasi-indexers held about 38% of the total shares outstanding.

9
3 Sample Formation and Variable Construction

3.1 Sample Formation

We merge the Markit data with CRSP/Compustat, obtaining a total of 57,237 firm-quarter
observations. Following Almeida et al. (2004), we exclude from our tests firms that have assets
smaller than $10 million, firms that have missing entries for cash holdings, firms that have
missing or negative sales, and firms that have asset or sales growth in excess of 100%. We also
exclude non-profits, and governmental firms. Our final sample contains 51,331 firm-quarter
observations from 3,050 unique firms.
We combine our Markit/CRSP/Compustat data with information on institutional owner-
ship to perform some of our tests. The Thomson-Reuters 13f institutional holdings data allow
us to compute aggregate institutional ownership for each stock in a given quarter. We use
Bushee’s (2001) investor classification methodology to gauge the fraction of the firm held by
“Quasi-Indexers” funds and use it as our proxy for passive ownership (Passive IO).9 These
institutional investors tend to have low turnover, high portfolio diversification, and follow con-
trarian strategies. As mentioned by Bushee (2001), this group “... does not explicitly index,
but follow longer-term buy-and-hold strategies.” and its composition is quite persistent, with
80% of institutions in this group in year t still being “Quasi-Indexers” at t+3.

3.2 Variables

Our analysis starts with a traditional empirical cash model based on quarterly data. The
dependent and control variables are standard in the cash literature and follow Opler et al.
(1999), Almeida et al. (2004), and Bates et al. (2009). We describe these in this section. The
independent variables of interest are Supply and Net Supply (discussed just above). Variables
are winsorized at the 1%-level to reduce the impact of outliers. Additional details on variable
construction are found in the Appendix.
9
Brian Bushee’s classification is available at http://acct.wharton.upenn.edu/faculty/bushee/IIvars.
html

10
3.2.1 Dependent Variables

Our main dependent variable is the ratio of cash holdings to lagged assets (Cash). We
compute Cash by dividing the firm’s cash holdings at quarter t (Compustat’s mnemonic cheq)
by the firm’s total assets (atq) in quarter t-1. We also define a measure of a firm’s “ex-
cess cash” that is computed relative to a size-BM-industry-adjusted benchmark value (Excess
Cash). The approach follows Pinkowitz et al. (2013), where in each quarter we split firms into
three terciles based on market capitalization and into three terciles based on book-to-market
ratios. The sorts are independently calculated and yield nine categories. For each category, we
identify the industry benchmark cash as the median cash-to-assets ratio of firms in the same
2-digit SIC code and subtract that figure from a firm’s cash ratio. This approach addresses (ex
ante) a number of possible drivers of cash policies at firms and also accounts for intra-industry
interactions on financial policy (see Fresard (2010)).
Beyond cash savings policies, we also examine stock repurchases. We define Repurchases as
the ratio of total stock repurchases (Compustat’s prstkc) by a firm in a given quarter scaled by
the firm’s total asset in the prior quarter. Similarly, we also compute Net Repurchases, where
we account for the amount of stock issuance made during a particular quarter (or, prstkc – sstk ).

3.2.2 Control Variables

The basic set of control variables comes from the parsimonious cash model used by Almeida
et al. (2004). Control variables in this set are: Cash Flow (ibq + dpq), Market-to-Book ((prcc
× csho + taq – ceq)/atq), and Size (atq). Following other studies in the literature (e.g., Opler
et al. (1999) and Bates et al. (2009)), we extend this set by adding net working capital (NWC)
(or, actq – lctq – cheq), Investment (capx ), R&D (xrdq), and Acquisitions (aqc). All variables
are lagged one quarter and scaled by total assets. Other variables in this set include a control
for industry cash flow risk (Industry Sigma), which is the standard deviation of cash flows of
all firms having the same 2-digit SIC code, and an indicator variable (IPO) that equals to 1 if
the firm had its IPO in the past 5 years.

11
3.3 Descriptive Statistics

Table 1 reports the descriptive statistics for our sample. Firms on average keep about 20%
of their total assets as cash; similar to values reported by, for example, Bates et al. (2009).
The average quarterly amount of share repurchases corresponds to 0.6% of total assets, but
more than half of the firms do not buy back shares at all; the median equals zero. Overall,
statistics for the dependent and control variables in our study are similar to those of prior cash
studies and we omit a detailed discussion for simplicity.
Supply and Net Supply represent, on average, some 22% and 17%, respectively, of a firm’s
total market capitalization. The average borrowing fee is 61 basis points, which means that
the daily equity borrowing cost for the average firm is just 0.002% (= 61.4/(252 × 100)). The
value of Fee, however, often surpasses 500 basis points. These high fees tend to occur for firms
going through financial problems that are heavily shorted by investors.

Table 1 About Here

4 Lendable Stocks and Cash Holdings: Baseline Fixed

Effects Estimations
We start our analysis by adding measures of the supply of lendable stocks to standard cash
models; in particular, models focusing on the “precautionary motive” for cash. These models
fit our analysis in that they emphasize firms’ use of liquid assets as a cushion to smooth out the
impact to external shocks. Our models are estimated with panel data and have the following
general form:
Cashi,t+1 = c + βSupplyi,t + γ 0 Xi,t + µi + µt + i,t . (1)

The dependent variable is measured, alternatively, by Cash or Excess Cash; while the inde-
pendent variable of interest is measured, alternatively, by Supply or Net Supply. The set of
control variables are contained in the matrix X. We experiment with two sets of controls. The
first set includes only Cash Flow, Market-to-Book, and Size (cf. Almeida et al. (2004)). The
second set adds on controls used subsequently in the cash literature: NWC, Investment, R&D,

12
Acquisitions, Industry Sigma, and IPO (cf. Bates et al. (2009)). The models perform within-
firm estimations where µi captures firm-fixed effects. One can think of the results returned as
describing within-firm changes in Cash (or “savings”) following firm-specific changes in Supply,
where we expect the estimate for β to be positive. The model further accounts for time-fixed
effects via µt , which absorbs year-quarter specific variation.
Table 2 presents the results. We consider two alternative measures of cash, two alternative
proxies for the supply of lendable stocks, and two alternative models for cash. Accordingly, the
table contains a total of eight columns representing all possible proxy–model combinations.

Table 2 About Here

The estimations performed unanimously point to a positive relation between corporate cash
building and the supply of lendable stocks. The results are both economically and statisti-
cally significant. The coefficient of 0.071 associated with Supply in column (1), for example,
implies that the one-interquartile range (IQR) difference in Supply is associated with a 1.1%
(= 0.071 × 17.88%) increase in cash holdings in the following quarter, which is equivalent to
a 6.3% increase in cash holdings relative to the sample mean. A similar coefficient is reported
in column (3), where Net Supply measures only the slack supply and accounts for the volume
of stocks already lent out. That coefficient is, as expected, larger, since it better identifies the
source of potential supply for shorting that may require corporate actions.
The results from Table 2 are consistent with the precautionary-type view that firms in-
crease their stock of cash when there are more stocks available for shorting. Inferences base
on estimates reported in the table are, however, limited by the lack of exogenous variation in
lendable supply. In turn, we strive for identifying the impact of exogenous shifts in the supply
of lendable stocks on cash policies.

13
5 Endogeneity of Lendable Stocks: Instrumental Vari-
ables using Passive Institutional Ownership
The standard cash model suggests that the supply of lendable stocks influences corporate
savings over and above traditional drivers of corporate liquidity. Yet, it is difficult to rule
out the possibility that endogenous biases cloud our inferences. For example, D’Avolio (2002)
shows that institutional ownership is a key driver of lendable supply. At the same time, insti-
tutions may pick stocks based on unobserved characteristics that are related to cash holdings.
Indeed, outside of the “precautionary view” of cash holdings, previous researchers have found
correlation between institutional ownership and cash, which they have attributed an “agency
view” (e.g., Harford et al. (2008)).10 As such, one could argue that institutional ownership
should be included in Eq. (1). Moreover, recent work by Nyborg and Wang (2014) posits a
theory in which prices cascades affect firms with more liquid stocks. According to their “infor-
mation feedback view,” firms with more liquid stocks will hold more cash. Whether we include
institutional ownership (cf. Harford et al. (2008)) or stock liquidity measures (cf. Nyborg and
Wang (2014)) in our baseline model, we still find a positive impact of lendable supply of stocks
and cash holdings. Critically, including those additional variables in a regression does not help
us address the issue of supply endogeneity. As we discuss in turn, however, understanding
these dynamics can be useful.

5.1 Test Set Up

Institutions have increased their equity ownership in a dramatic fashion in recent years, in
particular there has been a large growth in passive ownership. This form of ownership par-
ticipation is driven by market preferences that dictate “investment styles,” and makes funds
interested in particular stocks only for as long as they belong to an index or fulfill a style
profile. Ownership under this form of investing tends to display low turnover and be highly
diversified. Indeed, passive funds are defined by the SEC as those that have “investment results
corresponding to the movements of a specified index,” without their managers selecting stocks
10
Under this view, institutions work as monitors of managerial misconduct and higher institutional ownership
is related with lower cash holding.

14
on an active basis.
We exploit the relevance of the market for passive stock ownership in the equity lending mar-
ket to identify supply in our cash model via an instrumental variables framework (see Aggarwal
et al. (2014), and Massa et al. (2014)). To wit, increases in passive ownership lead to shifts in
lendable supply (inclusion restriction). These shifts are born out of developments in the com-
petition for funds in the index investment industry and (otherwise) unrelated to corporations’
demand for savings (exclusion restriction). Indeed, their very (passive) nature makes it unlikely
that their equity holding demands are driven by considerations such as corporate monitoring
and disciplining, considerations that could potentially be associated with observed cash policies.
Following Bushee (2001), we identity holdings of quasi-indexers for a given firm-quarter
to proxy for passive institutional ownership. In particular, we define Passive IO as the frac-
tion of firms’ shares that are held by “Quasi-Indexers.” The relevant data is available between
September 2006 and December 2012 for a total of 51,331 firm-quarters.
The first-stage regression of our IV model can be written as follows:

Zi,t = c + βP assive IOi,t + γ 0 Xi,t + µi + µt + i,t . (2)

where Zi,t is the variable being instrumented ∈ {Supply; Net Supply}. The second-stage can
be written as:
Cashi,t+1 = c + β Zbi,t + γ 0 Xi,t + µi + µt + i,t . (3)

where Zbi,t is the projection of lendable supply ∈ {Supply;

\ Net\ Supply}.

5.2 Results

Table 3 reports the first-stage estimates of Supply and Net Supply as a function of our pas-
\
sive ownership instrument. We label the predicted values of Supply and Net Supply as Supply
and Net\
Supply, respectively. As expected, Passive IO is an important shifter of lendable sup-
ply. A one-percent increase in Passive IO increases Supply by 0.5% and Net Supply by 0.3%,
respectively. The first-stage Kleibergen-Paap LM test for instrument’s under-identification and
the Kleibergen-Paap Wald test for weak identification strongly reject their null hypotheses.

15
 Table 3 About Here

\ are shown in columns (1)

Table 4 reports the second-stage estimation. Results for Supply
and (2), while results for Net\
Supply are in columns (3) to (4). Results from these estimations
confirm our earlier inferences: increases in the supply of lendable stocks lead firms to increase
their cash holdings in the next period. To illustrate the economic meaning of our results,
\ is
the 0.446 coefficient for Supply in column (1) implies that a one-IQR increase in Supply
associated with a 3.6% increase in Cash, equivalent to a 17.6% spread relative to the mean
Cash value (or 13.6% of the IQR variation of Cash). These results confirm our baseline find-
ings of a relevant, positive relationship between lendable lendable supply and cash holdings.
They further imply a causal direction, with shifts in the supply of lendable stocks prompting
subsequent changes in corporate cash savings.

Table 4 About Here

6 Endogeneity of Lendable Stocks: Regression Disconti-

nuity Designs and Local Instrumental Variables Using
Russell Indices Reconstitution
A particularly important trend in institutional investment in the last decade is the growth
of “index investing.” In this case, investment funds are solely concerned with the goal of hav-
ing portfolio returns that mimic as closely as possible the returns of their targeted benchmark
indices. Fund managers pursue their desired style by minimizing “tracking errors” which is
achieved by a careful rebalancing of the stocks in their portfolio so as to reflect the stocks in
the targeted index. Because the composition of market indices change discretely on a regular
basis (firms are dropped and included in major indices at least once every year), we can use
index changes to gauge “locally exogenous shifts” in the supply of lendable stocks. To wit, as
firms are dropped and included in different indices, tracking funds are forced to reshuffle their
investments in firms affected by index reconstitution. As mimicking passive funds change their

16
holdings, the supply of lendable stocks changes as well.
In this setting, we focus on the annual reconstitution of the Russell 1000 and Russell 2000
indices, whose memberships are composed of firms ranked according to their market capi-
talization from 1st to 1000th and from 1001th to 3000th , respectively. The Russell indices are
value-weighted, so that stocks at the top of one index receive heavy index buying, whereas those
at the bottom receive close to none. To the extent that index switching in a narrow bandwidth
around the Russell 1000/Russell 2000 index cut-off resembles a near-randomization process, we
can use this process to capture shifts in the supply of lendable stocks in our tests. These dy-
namics are outside of firm managers’ control and represent a sharp, localized shift in the supply
of lendable stocks. This setting has been used to study the effects of institutional holdings on
dividend policy (Crane et al. (2014)) and the return effects of indexing (Chang et al. (2014)).11

6.1 Setting Details

On the last trading day of May, Russell’s equity indices are formed, with eligible stocks
being ranked by Russell’s proprietary measure of stock market capitalization.12 The largest
1,000 firms are included in the Russell 1000 index while the next 2,000 make up the Russell
2000.13 Small changes in the capitalizations of firms ranked near the 1,000th position cut-
off make stocks move between these indices. Following the May index assignment, portfolio
weights are reconstituted on the last Friday in June and index weights computed based on a
free-float measure of market capitalization estimated by Russell.
A stock at the bottom of the Russell 1000 index will have a very small weight in the in-
dex (“a small fish in a big pond”) and will thus be ignored by index investors. If the stock,
however, moves to the top of the Russell 2000 (becomes “a big fish in a small pond”), then
any funds that benchmark the Russell 2000 will have to buy it to minimize the tracking error.
As a result, the stock will witness a sudden increase in its passive institutional ownership. We
consider two ways to exploit the increase in the supply of lendable stock that accompanies
the shift in institutional ownership around the annual reconstitutions of the Russell indices to
11
None of those papers consider effects associated with the supply of lendable stocks.
12
See http://www.russell.com/indexes/documents/methodology.pdf for details.
13
Since 2007, Russell has used a procedure that reduces the possibility that a given stock jumps too often
across indices. This makes the Russell 1000 index to have slightly less or more than 1,000 constituents.

17
 86

22
T+1 Inst. Ownership (% Mkt. Cap)

T+1 Net Supply (% Mkt. Cap)

84

20
82

18
80

16
78

-500 0 500 -500 0 500

Distance from Threshold Distance from Threshold

Figure 3
Russell 2000 Membership Cut-off: Institutional Ownership and Net Supply
This figure displays polynomial-smoothed plots of institutional ownership and Net Supply around
the Russell 1000/2000 threshold. The distance from the threshold is based on May’s CRSP market
capitalization, while index membership uses Russell’s constituents list in June of a given year. Net
Supply is defined as the difference between the number of shares available to lend and the number of
shares lent out, scaled by total shares outstanding. The shaded area corresponds to 90% confidence
intervals and the fitted lines are based on a non-parametric polynomial estimated using an Epanech-
nikov kernel, with the optimal bandwidth selected using the ROT method. Each dot corresponds to
the average of observations with bins of size 20.

study changes in corporate cash.

6.2 Visual Analysis

We begin our exploration of the joint discontinuity in stock ownership and supply with a
graphical representation of what takes place in the variables of interest (both forcing variables
and outcome variables) around the relevant index inclusion threshold (cf. Lee and Lemieux
(2010)). Figure 3 plots non-parametric polynomial lines estimated using an Epanechnikov
kernel, with the bandwidth selected using the ROT method and 90% confidence bands shown
in gray. The figure displays results for institutional ownership and lendable supply around the
Russell 1000/2000 threshold at the end of the quarter following index reconstitution.
The plot on the left panel of Figure 3 shows a pronounced upwards jump in institutional
ownership for stocks to the right of the Russell 1000/2000 threshold. Confirming our priors,
this shift is explained by the sudden increase in the demand by investment funds that bench-
mark the Russell 2000. Indeed, stocks to the right of the Russell 1000/2000 threshold will have
the biggest weights in institutional investors’ portfolios. This pattern stands in contrast to

18
 25

10 8
T+1 Excess Cash (% Assets)
20
T+1 Cash (% Assets)

6
15

2 4 0
10

-500 0 500 -500 0 500

Distance from Threshold Distance from Threshold

Figure 4
Russell 2000 Membership Cut-off: Cash Holdings
This figure displays polynomial-smoothed plots of Cash and Excess Cash around the Russell
1000/2000 threshold. The distance from the threshold is based on May’s CRSP market capital-
ization, while index membership uses Russell’s constituents list in June of a given year. The shaded
area corresponds to 90% confidence intervals and the fitted lines are based on a non-parametric poly-
nomial estimated using an Epanechnikov kernel, with the optimal bandwidth selected using the ROT
method. Each dot corresponds to the average of observations with bins of size 20.

that of the left of the threshold, which contains stocks with the smallest weights in the Russell
1000 index. The plot on the right of Figure 3 confirms the hypothesis that index membership
switches around the Russell 1000/2000 threshold drives pronounced shifts in the supply of
lendable stocks (proxied by Net Supply).
In Figure 4, we examine Cash and Excess Cash, our outcome variables of interest, around
the Russell 1000/2000 threshold. Here, too, there is a sharp increase to the right of the
threshold for both variables. Our earlier results that the supply of lendable stocks drive cash
policies are further confirmed along these pre-determined, non-linear discontinuity rules for
index investing.

6.3 RDD Results

Russell, Inc. does not divulge the exact metric it uses to assign firms to its market in-
dices. While we discuss the implications of that shortcoming below, we first experiment with
the use of a “sharp” regression discontinuity design (Lee and Lemieux (2010)) approach to
assess the effect of shifts in the supply of lendable stocks on corporate cash. Results from the
“sharp RDD” design are easy to interpret and already point to the findings we report from
the alternative IV estimation performed shortly.

19
 The standard RDD test we perform uses changes in the extensive and intensive margins of
index membership to measure the impact of stock supply on corporate cash. Each year, we take
the Russell 1000 and Russell 2000 constituents list in June of each year and rank firms in each
index using May’s market capitalization from CRSP and estimate the following regression:

Yi,t+1 = αi + αt + τ0 Di,t + τi Ri,t + κi Di,t ∗ Ri,t + δ 0 Xi,t + ξi,t (4)

where Yi,t+1 is the dependent variable in the quarter following reconstitution (i.e., at the end of
October), Di,t is a dummy variable equal to one if firm i is included in the Russell 2000 in June
of year t, and Ri,t is the rank distance from the Russell 1000/2000 threshold based on CRSP
market capitalization in May.14 Chang et al. (2014) shows that using June-based weights lead
to severe biases and advocates computing rankings based on May’s CRSP-based market capi-
talization. We include firm- and year- fixed effects and report standard errors clustered at the
firm level. To mitigate concerns that other variables could still confound our estimations, we
include the extensive set of controls used in previous estimations, all measured in the quarter
before index reconstitution. Since we want to ensure that the changes we observe cannot be
ascribed to other effects associated to changes in passive institutional ownership around the
cut-off itself, we add it as an additional control.
Table 5 reports results using the overall sample of 3,000 firms in the two indices. It also
reports results for firms within alternative windows around the Russell 1000/2000 threshold
(100, 200, and 300 firms, on each side of the threshold). These tests show that as firms migrate
from the Russell 1000 index to the Russell 2000 index — when there is a sharp positive shock
to the supply of lendable stocks — their cash stocks increase in the next quarter. Moreover,
the increase in cash is a function of the distance (weight ranking) of the firm in the new index.
In particular, the lower the firm’s rank position in the new index — thus, the less important it
is for index investors to buy the firm’s stock — the lower is in the increase in the firm’s cash.
It is useful to go through an hypothetical exercise in order to interpret the economic mean-
ing of our results. In particular, we can use our RDD estimates to compare the difference
in cash holdings between a firm ranked 50 places below the Russell 1000/2000 threshold and
another 50 above that threshold. The estimate for the [–100, +100] window under column (2)
14
Results using May free-float estimates provided by Russell yield even stronger results.

20
of Table 6 implies that the difference in Cash across those two firms is 2.9%. This corresponds
to 11.2% (14.5%) of the interquartile range (sample average) for cash holdings.

6.4 Local Instrumental Variables Test Strategy

The fact that covariates other than Di,t and Ri,t (e.g., Size) are significant even under a
small [–100, +100] window around the index threshold casts doubt on a regression disconti-
nuity design using the Russell Index membership changes. Another limitation of the RDD
strategy is that index switching may drive changes not only in the supply of lendable stocks,
but other potentially relevant dimensions like institutional ownership and stock liquidity. To
fend against these alternative explanations we exploit the Russell index membership switch in a
different way. In particular, we resort to a more standard IV approach (other papers using this
approach are Crane et al. (2014) and Appel et al. (2014)). In it, we use index membership and
distance to threshold to instrument the lendable supply measures in a first stage estimation.
We thus recover the change in lendable stock supply that is directly induced by membership
switching across the Russell 1000/2000 indices and the distance from the threshold. We then
use that projected measure to gauge the effect of lendable stocks on corporate cash.
The estimation is performed using two-stage least squares using the set of control variables
used in previous tests, including institutional ownership, firm- and year-fixed effects. The
first-stage estimates the current quarter’s Supply and Net Supply as a function of Russell 2000
membership dummy, Di,t , and distance from the Russell 1000/2000 threshold (centered at zero
around the threshold), Ri,t . The specification also includes a term for the interaction of Di,t
and Ri,t , and a set X of control variables. The model can be written as:15

Zi,t = αi + αt + τ0 Di,t + τi Ri,t + κi Di,t ∗ Ri,t + γ 0 Xi,t + ξi,t (5)

where Zi,t is the variable being instrumented ∈ {Supply; Net Supply}. Standard errors are
clustered at the firm level.
Panel A of Table 6 reports the first stage results. Estimates under column (2) suggest
that Net Supply is higher for firms in the Russell 2000 around the index threshold. However,
15
We also have estimated regressions with second- and third-order terms for our instruments, obtaining
similar quantitative results.

21
it decreases (increases) as one moves further away from the threshold into the Russell 1000
(2000), with the Di,t ∗Ri,t interaction term showing that the slopes are different as one deviates
from the cutoff into the Russell 1000 or Russell 2000.
In the second stage, we regress corporate cash measures in the following quarter (Yi,t+1 ) on
the component of supply that is explained by index membership changes and index rankings
from the first-stage. The model can be written as follows:

Yi,t+1 = θi + θt + γ 0 Zc 0
i,t + β Xi,t + εi,t+1 (6)

where Yi,t+1 is the relevant corporate outcome variable ∈ {Cash; Excess Cash} in the quarter
following index reconstitution (October-end data).
Panel B Table 6 presents the second-stage estimation results. Similarly to the “global” IV
regressions that use Passive IO as an instrument, the alternative “local” IV regressions also
yield positive and statistically coefficients for the impact of Supply and Net Supply on Cash
and Excess Cash.
To gauge the economic impact of Net Supply, we repeat the procedure used in Table 5
and compare what is the expected difference in cash holdings due to predicted differences in
lendable supply between a firm ranked 50 places below the Russell 1000/2000 threshold and
another 50 above that threshold. In particular, using the first-stage estimates shown in column
(2) of Panel A, the predicted difference in Net Supply is equal to 2.5%. Combining this value
with the 1.925 coefficient in column (2) of Panel B results in a change in Cash equal to 4.86%,
equivalent to a 0.19 IQR difference (or 24% of the sample average). These results suggest that
our earlier findings are robust to endogeneity concerns and are similar to those found using
Passive IO as an instrument for Supply.

Table 6 About Here

22
7 Robustness Tests

7.1 Stock Repurchases

Our precautionary savings hypothesis posits that firms accumulate cash to defend against
potential short sellers when selling the company’s stock is easier. The extra cash balance can
then be used to repurchase those stocks if necessary. While firm cash policies may partially
deter short sellers, at times, firms will need to repurchase their stocks. As an alternative test
for our argument, we examine if firms increase repurchases of their own stock when lendable
supply is high. We do so via an instrumental variable approach similar to that of Section 5.
The dependent variable of interest are now Repurchases and Net Repurchases (as opposed to
Cash and Excess Cash).
\ and
Table 7 presents the results. All coefficients for lendable supply measures (Supply
Net\
Supply) are positive and statistically significant. They are also economically significant.
They imply, for example, that a one-IQR change in Net Supply increases firms’ repurchases in
the next quarter by 0.36%, equivalent to 3.6 times the IQR variation for repurchases (or 59%
of the sample average).

Table 7 About Here

Not only do firms hoard more cash in response to increases in the supply of shortable stocks,
but they also more actively engage in open market repurchase following those same shifts.

7.2 Loan Fees as an Alternative Measure of the Ease to Short Stocks

The measures of short sales constraints we have employed thus far are based on the quan-
tity of stocks available for lending. A natural alternative approach to the same problem would
involve looking at the cost of shorting. In Table 8, we repeat our baseline regressions using
the value-weighted loan fee of all outstanding equity loans of a stock as a proxy for shorting
costs. A high fee potentially captures both a high demand and low supply for the shares of a
company. This price-based measure of short sales constraints lead us to expect that high-fee
firms prompt firms to hold relatively lower cash balances and also engage in fewer repurchases,

23
as it is costly for short sellers to posit a threat to their stocks. This is exactly what we find in
Table 8. In Panel A, we report the estimated F ee coefficients using firm- and year-quarter-fixed
effects regressions. Cash, Excess Case, Repurchases and Net Repurchases are all negatively
affected by F ee.

Table 8 About Here

One of the problems with using loan fees to measure short sales constraints is that a high
fee may be due to extremely pessimistic views about the firm rather than due to difficulties
in shorting shares (Cohen et al. (2007)). In Panel B, we address this issue by reporting IV
estimates using Passive IO as an instrument. All F
d ee coefficients are negative and statistically
significant. The unreported first-stage coefficient for Passive IO is -0.18, with a t-statistic of
-13.7. The rk Wald F statistic for the first-stage regression is equal to 33.18, rejecting the null
hypothesis that instruments are weak. Estimates from column (1) of Panel B imply that a
one-IQR increase in F ee leads to a 0.3% drop in cash holdings in the following quarter (about
1.2% decrease relative to Cash’s IQR). These estimates are low due to the fact that the vast
majority of stocks are very cheap to borrow. As we move from the 75th to the 90th percentile,
the average fee (and associated change in cash) increases by almost five times.
Finally, in Panel C we repeat the regression discontinuity design shown in Table 6 with
Fee as variable being instrumented by the Russell index reconstitution variables. Coefficients
also have the expected sign and are significant for all dependent variables apart from Net
Repurchases.

7.3 Cash Holdings and Equity Lending in the Presence of Financial

Constraints

Almeida et al. (2004) describe how managers increase corporate liquidity as a way to prevent
that limited credit access causes to turn down profitable investment opportunities. Concerns
about how credit markets can lead to suboptimal capital allocation at firms are raised in
the theoretical work of Goldstein and Guembel (2008). Those authors discuss, in particular,
the critically negative effects of stock price manipulation by speculators. This logic suggests

24
that managers of constrained firms may have a greater desire to accumulate cash as a way to
counter the impacts of short selling on their stocks. Our final set of tests examine if the effect
of changes in lending supply on cash holdings is modulated by the degree to which firms are
financially constrained.
In Table 9, we split the sample using three measures of financial constraints and apply the
passive ownership (Quasi-Indexers) instrumental variables approach of Table 4. To measure
financial constraints, we compute dividend payout (defined as dividend payments divided by
operating earnings) and firm assets as in Almeida et al. (2004), sorting firms each quarter into
deciles for each measure. We classify firms as “financially constrained” (C ) if they are at the
bottom three deciles of the payout or size distribution. “financially unconstrained” (U ) firms
are in the top three deciles of those distributions. Alternatively, we follow Hadlock and Pierce
(2010) and compute the size-age (SA) Index and define as financially constrained those firms in
the top three deciles of the SA Index distribution; unconstrained firms are those in the bottom
three deciles of that index.

Table 9 About Here

In column (1) of Panel A we report the full sample coefficients for Supply. Columns (3),
(5) and (7) show that cash holdings of financially constrained firms are far more sensitive to
changes in lendable supply regardless of the definition of constraints. For example, the 0.609
coefficient in column (7) of Panel A shows that constrained firms according to the SA Index
are almost three and half times more sensitive to change in lendable supply than those that
are not. In Panel B, we reach the same conclusions using Net Supply as our alternative proxy
for the supply of lendable stocks.
Our evidence shows that firms facing difficulties in funding attempts to stabilize stock prices
are particularly more inclined to hoard cash in response to increases in the supply of stocks
available for shorting.

25
8 Concluding Remarks
We study the link between the equity lending market and corporate savings. Consistent
with a “precautionary” view, we find that managers react to the easiness of shorting shares in
their company by adjusting levels of cash holdings and stock repurchase activity. Our analysis
has direct links with the literature on corporate cash savings, equity lending markets, and short
sales. The overall theme, nonetheless, is that of fleshing out important connections between
the workings of stock markets and observed corporate policies. Several decisions are taken
by managers on a continuous basis, and these are likely to be shaped not only by the firm’s
business operations but also by developments in capital markets.
In the process of designing our experiments we combine several unique datasets and tech-
niques. Our results are novel and economically strong in showing how corporate savings in-
crease when there is more lendable supply available. Our tests are informed and guided by
the unique institutional set we consider. First, we use variation in stock ownership by quasi-
indexers funds, who are large supplier of shares in the equity lending market, to identify
exogenous shocks to lendable supply that are unrelated to changes cash. Second, we also
examine the reconstitution of Russell Indices, when large changes in stock ownership occur
around the membership threshold, as an alternative (albeit more local) identification strategy.
Notably, our findings are even stronger for financially constrained firms; exactly those that
would have the largest incentives to accumulate large cash balances. In all, our results uncover
important new effects that (secondary) financial markets activities and institutions exert on
corporate policies. We believe that understanding these effects is important for researchers,
managers, and policy makers.

26
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 Appendix A: Variables Definition

Variable Definition
Cash (Cash & Short-term Equivalents) ÷ Lagged Book Assets.
Excess Cash Cash Holdings – Benchmark Cash,with Benchmark Cash defined as the median value of firms with the same 2-digit SIC code,
B/M, and market capitalization terciles (DeAngelo et al. (2010)).
Repurchases (Purchase of Common and Preferred Stock) ÷ Lagged Book Assets
Net Repurchases (Purchases – Sales of Common and Preferred Stock) ÷ Lagged Book Assets
Supply End-of-quarter fraction of market capitalization available to lend
On Loan End-of-quarter fraction of market capitalization effectively lent out.
Net Supply Supply – On Loan.
Short Interest End-of-quarter short positions held by investors as a fraction of market capitalization.

29
Fee Value-weighted loan fee at the end of the quarter (in annualized %)
Total IO Fraction of the firm held by institutional investors computed from 13f files.
Passive IO Fraction of the firm held by quasi-indexers institutions as in Bushee (2001).
Size Firm assets in US$ billions.
Market-to-Book Market value of common shares ÷ Book Assets.
CashFlow (Income Before Extraordinary Items + Depreciation and Amortization) ÷ Lagged Book Assets.
NWC (Current Assets – Current Liabilities – Cash & Equivalents ) ÷ Lagged Book Assets.
Investment (Capital Expenditures) ÷ Lagged Book Assets.
Industry Sigma Standard deviation of Cashflows of all firms in the same 2-digit SIC code across the whole sample (Bates et al. (2009)).
R&D (Research & Development Expenses) ÷ Lagged Book Assets.
Acquisitions Acquisitions ÷ Lagged Book Assets.
IP O Indicator variable equal to 1 if firm did its IPO in the past 5 years.
Table 1
Descriptive Statistics
The table shows quarterly descriptive statistics of the main variables used analysis. Equity lending
data are provided by Markit, price data are from CRSP, ownership data from SEC’s 13F holdings,
and accounting data from Compustat. The variable definitions are in Appendix A.

Variable Mean Median St. Dev. 25th Pct. 75th Pct. Obs.
Cash 20.31% 11.80% 22.52% 3.57% 29.82% 57,228
Excess Cash 2.93% 0.00% 18.01% -5.14% 8.48% 57,228
Repurchases 0.59% 0.00% 2.13% 0.00% 0.10% 57,228
Net Repurchases -0.27% 0.00% 6.13% -0.11% 0.02% 57,228
Supply (% mktcap) 21.74% 22.89% 11.79% 12.36% 30.23% 57,242
On Loan (% mktcap) 4.58% 2.42% 5.68% 0.66% 6.28% 57,242
Net Supply(% mktcap) 17.15% 17.62% 10.71% 8.07% 25.28% 57,242
Short Interest 5.55% 3.53% 6.33% 1.24% 7.59% 56,803
Fee (% p.a.) 0.61 0.11 1.79 0.07 0.20 57,084
Total IO 63.39% 70.17% 28.15% 42.50% 87% 57,242
Passive IO -40.25% 43.14% 20.31% 23.99% 56% 57,242
Size (US$ bil) 4,201 563 15,062 146 2,284 57,242
Market-to-Book 2.72 1.90 3.68 1.18 3.17 57,234
Cash Flow 1.16% 2.05% 5.17% 0.72% 3.34% 57,234
NWC 7.78% 6.44% 17.11% -2.72% 17.86% 55,943
Investment 1.33% 0.75% 1.83% 0.34% 1.56% 56,111
Industry Sigma 3.55% 3.69% 1.29% 2.43% 4.38% 57,228
R&D 1.32% 0.00% 2.68% 0.00% 1.68% 57,242
Acquisitions 0.59% 0.00% 2.84% 0.00% 0.00% 57,233
IPO 0.13% 0.00% 0.34% 0.00% 0.00% 57,228

30
Table 2
Equity Lending and Cash Holdings: Fixed-Effects Regressions
This table displays regressions of next quarter’s cash holdings and excess cash holdings as a function of equity
lending variables with quarterly stock data. All regressions have firm and year-quarter-fixed effects. The
variable definitions are in Appendix A. We report standard errors clustered at the firm level in brackets.

Dep. Var.: Casht+1 Excess Casht+1

(1) (2) (3) (4) (5) (6) (7) (8)
Supplyt 0.071*** 0.082*** 0.052*** 0.060***
[0.018] [0.018] [0.019] [0.019]
Net Supplyt 0.080*** 0.084*** 0.069*** 0.076***
[0.017] [0.017] [0.017] [0.017]
Sizet -5.578*** -5.534*** -5.446*** -5.370*** -1.939*** -2.164*** -1.859*** -2.064***
[0.532] [0.544] [0.529] [0.540] [0.535] [0.540] [0.532] [0.538]
Market-to-Bookt 0.139*** 0.143*** 0.141*** 0.146*** 0.011 0.024 0.012 0.026
[0.035] [0.035] [0.035] [0.035] [0.040] [0.040] [0.040] [0.040]
Cash Flowt 0.115*** 0.133*** 0.113*** 0.132*** 0.056** 0.058** 0.054** 0.056**
[0.022] [0.022] [0.022] [0.022] [0.023] [0.023] [0.023] [0.023]
NWCt -0.108*** -0.108*** -0.062*** -0.062***
[0.015] [0.015] [0.016] [0.016]
Investmentt -0.286*** -0.281*** -0.298*** -0.294***
[0.056] [0.056] [0.056] [0.056]
Industry Sigmat 0.266 0.283 -5.157*** -5.138***
[0.422] [0.414] [0.887] [0.882]
R&Dt -0.171* -0.169* -0.300*** -0.300***
[0.098] [0.098] [0.107] [0.107]
Acquisitionst -0.225*** -0.227*** -0.223*** -0.225***
[0.016] [0.016] [0.018] [0.018]
IPOt 1.285** 1.296** 1.618*** 1.652***
[0.545] [0.548] [0.583] [0.581]
Obs. 52,316 51,331 52,316 51,331 52,316 51,331 52,316 51,331
Firms 3,105 3,050 3,105 3,050 3,105 3,050 3,105 3,050
Adj. R2 0.0425 0.0548 0.0430 0.0551 0.00337 0.0152 0.00390 0.0158
*** p-value<0.01, ** p-value<0.05, * p-value<0.10

31
Table 3
Global IV Regressions (1st Stage): Passive IO as an Instrument for Lendable Supply
The table displays the first-stage estimates of instrumental variables regressions of next quarter’s cash holdings
and excess cash holdings as a function of equity lending variables with quarterly stock data. We use passive
(quasi-indexers) institutional ownership as an instrument for Supply and Net Supply. All regressions have year-
quarter-fixed effects. The variable definitions are in Appendix A. The rk Wald F statistic tests for the null
hypothesis of weak instruments, while the rk LM statistic tests for the null hypothesis of under-identification.
We report standard errors clustered at the firm level in brackets.

Instrumented Var.: Supplyt Net Supplyt

(1) (2)
Passive IOt 0.446*** 0.320***
[0.006] [0.007]
Sizet 0.404*** 0.762***
[0.074] [0.074]
Market-to-Bookt -0.065*** -0.169***
[0.018] [0.021]
Cash Flowt 0.066*** 0.123***
[0.014] [0.015]
NWCt 0.013** 0.025***
[0.006] [0.006]
Investmentt 0.049 -0.184***
[0.043] [0.052]
Industry Sigmat 0.145 0.176*
[0.090] [0.092]
R&Dt 0.136*** 0.139***
[0.035] [0.037]
Acquisitionst 0.042*** 0.061***
[0.012] [0.012]
IPOt -1.385*** -2.453***
[0.232] [0.247]
Obs. 51,331 51,331
Adj. R2 0.676 0.539
Firms 3,884 3,817
rk Wald F 5,449*** 2,018***
rk LM 872*** 675***
*** p-value<0.01, ** p-value<0.05, * p-value<0.10

32
Table 4
Global IV Regressions (2nd Stage): Passive IO as an Instrument for Lendable Supply
The table displays estimates of instrumental variables regressions of next quarter’s cash holdings and excess cash
holdings as a function of equity lending variables with quarterly stock data. We use passive (Quasi-Indexers)
institutional ownership as an instrument for Supply and Net Supply. All regressions have year-quarter-fixed
effects. The variable definitions are in Appendix A. We report standard errors clustered at the firm level in
brackets.

Dep. Var.: Casht+1 Excess Casht+1

(1) (2) (3) (4)
\t
Supply 0.200*** 0.106***
[0.034] [0.032]
Net\
Supply t 0.279*** 0.149***
[0.048] [0.045]
Sizet -3.157*** -3.294*** -1.360*** -1.432***
[0.184] [0.199] [0.171] [0.183]
Market-to-Bookt 0.376*** 0.414*** -0.107* -0.087
[0.065] [0.068] [0.062] [0.063]
Cash Flowt 0.231*** 0.209*** 0.207*** 0.195***
[0.053] [0.054] [0.048] [0.049]
NWCt -0.252*** -0.256*** -0.205*** -0.208***
[0.017] [0.017] [0.016] [0.016]
Investmentt -1.531*** -1.469*** -0.614*** -0.581***
[0.100] [0.102] [0.100] [0.100]
Industry Sigmat 2.945*** 2.919*** -1.744*** -1.758***
[0.210] [0.213] [0.223] [0.223]
R&Dt 3.263*** 3.251*** 1.650*** 1.643***
[0.146] [0.146] [0.133] [0.133]
Acquisitionst -0.491*** -0.499*** -0.422*** -0.427***
[0.026] [0.026] [0.029] [0.029]
IPOt 4.140*** 4.555*** 3.557*** 3.777***
[0.726] [0.758] [0.714] [0.738]
Obs. 51,331 51,331 51,331 51,331
Adj. R2 0.464 0.464 0.121 0.122
Firms 3,884 3,817 3,884 3,817
*** p-value<0.01, ** p-value<0.05, * p-value<0.10

33
Table 5
Equity Lending and Cash Holdings: Sharp Regression Discontinuity Design
The table shows the impact of equity lending and institutional ownership on cash holdings using a sharp
regression discontinuity design based on Russell 2000 index membership data. The dependent variables Cash
and Excess Cash holdings (Yi,t+1 ) are measured in the quarter immediately after index reconstitution and are
explained as a function of Russell 2000 inclusion and the distance from the Russell 1000/2000 threshold:

Yi,t+1 = αi + αt + τ0 Di,t + τi Ri,t + κi Di,t Ri,t + X 0 δ + ξi,t ,

where Di,t is a dummy variable equal to one if firm i is included in the Russell 2000 in June of year t and Ri,t is
the rank distance from the Russell 1000/2000 threshold based on May CRSP market capitalization. We report
results using the overall sample and for alternative firm window sizes [100, 200, and 300] around the threshold.
Estimated regressions include variables X employed in Table 2 plus Passive IO as controls, all measured in
the quarter before index reconstitution. Regressions have firm and year fixed-effects and we report standard
errors clustered at the firm level in brackets.

Dep. Var.: Cash t+1 Excess Cash t+1

Window Size All Firms [-100,100] [-200,200] [-300,300] All Firms [-100,100] [-200,200] [-300,300]
Di,t 3.913*** 4.250*** 2.774*** 2.973*** 2.679*** 9.176*** 7.567*** 5.681***
[0.952] [1.598] [0.962] [0.741] [1.004] [1.986] [1.208] [0.950]
Ri,t -0.019*** -0.032* -0.015*** -0.016*** -0.012*** -0.035 -0.032*** -0.024***
[0.004] [0.017] [0.006] [0.003] [0.004] [0.023] [0.007] [0.004]
Ri,t Di,t 0.010*** 0.005 0.009 0.008** 0.006 -0.024 -0.006 0.001
[0.004] [0.021] [0.008] [0.004] [0.004] [0.031] [0.010] [0.005]
Sizet -12.685*** -7.349*** -9.602*** -8.443*** -7.842** -3.087 -5.127** -4.809***
[3.043] [2.032] [2.079] [1.520] [3.074] [2.093] [2.167] [1.571]
Market-to-Bookt -0.000 0.021 0.000 -0.004 0.001 0.007 0.005 -0.001
[0.011] [0.015] [0.009] [0.007] [0.011] [0.022] [0.013] [0.009]
Cash Flowt -0.028 0.018 0.214 0.183* -0.060 -0.268 0.057 -0.020
[0.071] [0.202] [0.144] [0.111] [0.070] [0.234] [0.174] [0.131]
NWCt -0.171*** -0.179*** -0.229*** -0.161*** -0.126*** -0.258*** -0.225*** -0.154***
[0.025] [0.064] [0.054] [0.042] [0.025] [0.086] [0.063] [0.045]
Investmentt -0.650*** 0.310 0.098 -0.129 -0.522*** 0.471 0.315 0.071
[0.130] [0.356] [0.469] [0.313] [0.135] [0.475] [0.501] [0.330]
Industry Sigmat 0.377 1.951 0.924 0.833 -2.077* -2.883 -2.900 -0.118
[0.709] [1.503] [0.735] [0.551] [1.122] [4.224] [2.314] [1.205]
R&Dt -0.431 -0.039 -0.256 0.661 -0.994** 1.524 0.032 0.366
[0.408] [1.370] [0.849] [0.665] [0.447] [1.854] [1.101] [0.932]
Acquisitionst -0.200*** -0.200** -0.197*** -0.197*** -0.228*** -0.322** -0.259*** -0.238***
[0.040] [0.083] [0.063] [0.050] [0.042] [0.125] [0.075] [0.057]
IPOt 1.792*** 2.290 -0.675 -0.099 1.264* 2.090 -0.360 0.529
[0.646] [2.359] [1.657] [1.204] [0.685] [2.459] [1.978] [1.362]
Passive IOt 0.032** -0.006 -0.018 0.001 0.040** -0.021 -0.005 0.020
[0.015] [0.035] [0.033] [0.024] [0.016] [0.046] [0.040] [0.028]
Obs. 17,857 1,025 2,348 3,619 17,857 1,025 2,348 3,619
Firms 2,805 349 614 807 2,805 349 614 807
2
Adj. R 0.100 0.164 0.137 0.111 0.036 0.132 0.072 0.051
*** p-value<0.01, ** p-value<0.05, * p-value<0.10

34
Table 6
Equity Lending and Cash Holdings: Local IV using Russell Index Membership
The table shows the impact of equity lending and institutional ownership on cash holdings using an instrumental
variable estimation based on Russell 2000 index membership data. The first stage estimates instruments equity
lending variables as a function of Russell 2000 inclusion and the distance from the Russell 1000/2000 threshold:

Zi,t = αi + αt + τ0 Di,t + τi Ri,t + κi Di,t Ri,t + X 0 δ + ξi,t ,

where Zi,t are the variables being instrumented (Supply and Net Supply), Ri,t is the rank distance from the
Russell 1000/2000 threshold based on May CRSP market capitalization, Di,t is a dummy variable equal to one
if firm i is included in the Russell 2000 in June of year t, and X is the set of controls used in Table 2 plus
institutional ownership. The second stage regressions present results for Cash and Excess Cash in the following
quarter (Yi,t ) as a function of instrumented proxies for equity lending variables (Zi,t ):

Yi,t+1 = θi + θt + γ 0 Z
d 0
i,t + X β + εi,t+1

Dependent variables (Yi,t+1 ) are measured in the quarter immediately after Russell index reconstitution while
control variables are measured in the quarter before. In Panel A, we only report the coefficients for Russell
2000 inclusion (Di,t ), the distance from the threshold (Ri,t ), and their interaction. In Panel B, we report the
coefficients on the instrumented variable used: Supply and Net Supply. The variable definitions are in Appendix
A. The rk Wald F statistic tests for the null hypothesis of weak instruments, while the rk LM statistic tests
for the null hypothesis of under-identification. We report standard errors clustered at the firm level.

Panel A: First stage

Dep. Var.: Supply t Net Supply t
(1) (2)
Di,t 3.000*** 3.170***
[0.488] [0.617]
Ri,t 0.002** -0.011***
[0.001] [0.001]
Ri,t Di,t -0.006*** 0.007***
[0.001] [0.001]
rk Wald F 37.27*** 35.63***
rk LM 88.04*** 85.70***

Panel B: Second stage

Dep. Var.: Cash t+1 Excess Cash t+1
(1) (2) (3) (4)
\t
Supply 1.064*** 0.692***
[0.240] [0.234]
Net\
Supply t 1.925*** 1.314***
[0.341] [0.317]
Obs. 11,716 11,716 11,716 11,716
Firms 2,194 2,194 2,194 2,194
*** p-value<0.01, ** p-value<0.05, * p-value<0.10

35
Table 7
Global IV Regressions (2nd Stage): Stock Repurchases
The table displays instrumental variables regressions of next quarter’s stock repurchases and net repurchases
as a function of equity lending variables, using quarterly stock data. The first-stage uses passive institutional
ownership as an instrument for lendable supply. All regressions have year-quarter fixed-effects. The variable
definitions are in Appendix A. Standard errors are clustered at the firm level and we report standard errors in
brackets.

Dep. Var: Repurchases t+1 Repurchases t+1 Net Repurchases t+1 Net Repurchases t+1
(1) (2) (3) (4)
\t
Supply 0.020*** 0.026***
[0.002] [0.004]
Net\
Supply t 0.028*** 0.036***
[0.004] [0.005]
Sizet 0.009 -0.005 0.092*** 0.074***
[0.014] [0.016] [0.021] [0.023]
Market-to-Bookt 0.047*** 0.050*** -0.087*** -0.082***
[0.007] [0.007] [0.024] [0.024]
Cash Flowt 0.057*** 0.055*** 0.218*** 0.215***
[0.005] [0.005] [0.016] [0.016]
NWCt -0.007*** -0.007*** -0.003 -0.003
[0.001] [0.001] [0.002] [0.002]
Investmentt -0.057*** -0.051*** -0.260*** -0.252***
[0.009] [0.010] [0.028] [0.028]
Industry Sigmat 0.067*** 0.064*** 0.099*** 0.096***
[0.015] [0.015] [0.027] [0.027]
R&Dt 0.019** 0.018** -0.371*** -0.372***
[0.008] [0.008] [0.036] [0.036]
Acquisitionst -0.018*** -0.018*** -0.020*** -0.021***
[0.003] [0.003] [0.007] [0.007]
IPOt -0.179*** -0.137*** -0.492*** -0.439***
[0.034] [0.036] [0.108] [0.109]
Obs. 51,331 51,331 51,331 51,331
Firms 3,884 3,817 3,884 3,817
Adj. R2 0.050 0.050 0.104 0.104
*** p-value<0.01, ** p-value<0.05, * p-value<0.10

36
Table 8
Borrowing Fees, Cash Holdings, and Repurchase Activity
The table shows the impact of equity lending and institutional ownership on cash holdings using borrowing
fees, based on quarterly data. Panel A is based on firm and year-quarter fixed-effects regressions as in Table
2. Panel B is based on a instrument variables (IV) regression using Passive IO as an instrument, defined as
quasi-indexers ownership from Bushee (2001). We use the same set of control variables as those shown in Table
2. Panel C shows results from IV regressions using Russell Index additions/exclusions similar to Table 6. The
rk Wald F statistic tests for the null hypothesis of weak instruments.

Panel A: Firm and Year-Quarter FE Regressions

Dep. Var: Cash t+1 Excess Cash t+1 Repurchases t+1 Net Repurchases t+1
(1) (2) (3) (4)
Fee t -0.187** -0.247*** -0.024*** -0.038
[0.081] [0.081] [0.008] [0.043]
Obs. 51,298 51,298 51,298 51,298
Firms 3,050 3,050 3,050 3,050

Panel B: IV Regressions using Passive IO as an Instrument

Dep. Var: Cash t+1 Excess Cash t+1 Repurchases t+1 Net Repurchases t+1
(1) (2) (3) (4)
F
d ee -4.670*** -2.441*** -0.485*** -0.622***
[0.889] [0.794] [0.072] [0.100]
Obs. 51,298 51,298 51,298 51,298
Firms 2,809 2,809 2,809 2,809
rk Wald F stat 179*** 179*** 179*** 179***

Panel C: IV using Russell Index Membership

Dep. Var: Cash t+1 Excess Cash t+1 Repurchases t+1 Net Repurchases t+1
(1) (2) (3) (4)
F
d eet -10.247*** -6.822*** -1.481*** 0.022
[2.085] [1.789] [0.346] [0.793]
Obs. 10,362 10,362 10,362 10,362
Firms 2,162 2,162 2,162 2,162
rk Wald F 12.4*** 12.4*** 12.4*** 12.4***
*** p-value<0.01, ** p-value<0.05, * p-value<0.10

37
Table 9
Global IV Regressions (2nd Stage): Cash Holdings and Financial Constraints
The table displays instrumental variables regressions of next quarter’s cash holdings as a function of equity
lending variables, using quarterly stock data. The first-stage use passive institutional ownership using the
quasi-indexers classification of Bushee (2001) as an instrument for lendable supply measures. Panel A display
coefficients for Supply and Panel B for Net Supply for regressions similar to those shown in 4. Column (1)
displays coefficients for the full sample. Columns (2)-(3) splits the sample by dividend payout (Div. Payout,
defined as annual dividend payments scaled by operating earnings; columns (4)-(5) uses firm Assets. For each
variable, we define “financially unconstrained” firms (U ) as those in the bottom three deciles of Div. Payout,
while “financially constrained” firms (C ) are those in the bottom three deciles. Column (6)-(7) use Hadlock and
Pierce (2010)’s size-age measure of financial constraints (SA Index ), where “financially unconstrained” firms
(U ) are those in the top three deciles, while “financially constrained” firms (C ) are those in the bottom three
deciles. All regressions have year-quarter fixed-effects. The rk Wald F statistic tests for the null hypothesis
of weak instruments, while the rk LM statistic tests for the null hypothesis of under-identification. Standard
errors are clustered at the firm level and we report standard errors in brackets.

Panel A: Supply
Sorting Variable Div. Payout Assets SA Index
Full Sample U C U C U C
(1) (2) (3) (4) (5) (6) (7)
\t
Supply 0.200*** 0.073 0.335*** 0.056 0.883*** 0.143** 0.609***
[0.034] [0.045] [0.048] [0.046] [0.107] [0.059] [0.094]
Obs. 51,331 22,280 25,455 21,522 13,700 16,511 13,356
Adj. R2 0.463 0.389 0.462 0.369 0.441 0.31 0.419
rk Wald F 5,449*** 3,111*** 2,983*** 2,969*** 877*** 3,638 1,163***
rk LM 872*** 513*** 544*** 557*** 212*** 622*** 234***

Panel B: Net Supply

Sorting Variable Div. Payout Assets SA Index
Full Sample U C U C U C
(1) (2) (3) (4) (5) (6) (7)

Net\
Supply t 0.279*** 0.107 0.444*** 0.073 1.137*** 0.201** 0.816***
[0.048] [0.066] [0.065] [0.059] [0.151] [0.083] [0.137]
Obs. 51,331 22,280 25,455 21,522 13,700 16,511 13,356
Adj. R2 0.456 0.387 0.447 0.368 0.406 0.304 0.388
rk Wald F 2,018*** 1,010*** 1,418*** 1,164*** 480*** 1,356*** 512***
rk LM 676*** 365*** 463*** 412*** 240*** 466*** 217***
*** p-value<0.01, ** p-value<0.05, * p-value<0.10

38