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One widely accepted idea is that high lending fees predict negative returns, since high fees capture negative information held by short sellers on the demand side. Tradition sees the supply side as passive, with stock lenders acting as price takers. Recent evidence, however, shows that lenders are not truly passive. This paper analyzes the Brazilian stock loan market, disentangling shifts in the shorting supply and demand curves to understand the mechanism linking the supply side and stock returns. We also connect the shorting supply curve with news reports and verify how lenders react to new information. Our results indicate that lenders decrease the loan supply when they predict negative future returns and use new information to change supply conditions, indicating that lenders are not price takers.
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