We exploit quasi-exogenous variation in passive ownership around the Russell 1000/2000 cutoff to explore the causal effects of passive ownership on the securities lending market. We find that passive ownership causes an increase in lendable supply and short interest, while lending fees remain largely unchanged. The utilization ratio—that is, the ratio of short interest over lendable supply—goes up, implying that shorting demand increases more than lendable supply. We argue that this additional demand results from an increase in the quality of lendable supply as passive funds are less likely to recall stock loans. This higher supply quality attracts informed short sellers, who improve the information efficiency around negative news releases and correct overpricing.

U.S. mutual funds in the securities lending market extract information from stock borrowing. Active funds exploit this information, rebalancing away from borrowed stocks whose prices tend to decrease, whereas passive funds do not. Information spillovers within fund families are stronger when the lender is a passive fund and when the family is more cooperative (less competitive). Active funds trade more aggressively on stocks with more negative future returns, suggesting that they are able to identify informed borrowing. Finally, passive funds charge higher lending fees than active funds, consistent with short sellers paying a premium to lower recall risk.

We study the extent of cross-asset learning in financial markets by examining the spillover effects around mutual fund fire sales, which lead to a well-documented impact-reversal pattern in returns. We find that the returns of fire sale stocks spill over onto the stock returns of economic peers with a magnitude of around one-third of the original effect. These spillovers extend to liquidity and are not explained by common funding shocks or the hedging activity of liquidity providers. We conclude that they represent information spillovers due to learning from prices, thus identifying cross-asset learning as an important driver for the commonality in returns and liquidity. (JEL G11, G12, G14, G23) Received July 1, 2021; editorial decision August 30, 2021.