Price Transparency in OTC Equity Lending Markets: Evidence From a Loan Fee Benchmark

We study the effects of a positive shock in price transparency in the Brazilian OTC equity lending market. Before March 1st 2011, a publicly available benchmark was computed as the average loan fee across all loan deals over the previous 15 trading days; on March 1st 2011, this interval was reduced from 15 to three days, increasing the benchmark precision and, consequentially, short-sellers' predictive power over current (unobserved) loan fees. Using difference-in-differences analysis, we show that this change resulted in lower loan fees, with stronger effects for short-sellers with higher search costs. Our results are consistent with the theoretical predictions in Duffie, Dworczak, and Zhu (2017) and can be of interest to regulators few countries have publicly available loan fee benchmarks.