Shorting Fees, Private Information, and Equity Mispricing

Decomposing lending fees into predicted (fair) and residual (premium or discount) fees reveals overpricing among a third of hard-to-borrow stocks: those for which borrowers pay a premium. Despite paying the highest fees, they are the only profitable shorters. Their net annualized profits of 5% reveal informed shorting. We also document smart lending. Lenders appear attuned to lending-market conditions, discounting fees on stocks with elastic shorting demand, thereby increasing revenues. Stocks with the most discounted fees attract the highest short interest, yet are predominantly easy-to-borrow. Their short sellers do not generate net shorting profits or appear motivated by private information.