Information Content of Stock Lending and Borrowing Transactions in Korea

In this paper, we analyze the impacts of stock lending and borrowing transactions on the capital market associated with regime change in the Korea Exchange (KRX). Based on the systematic characteristics of regulations governing short selling, we investigate the informational content of stock lending and borrowing transactions, as well as short selling transactions, by identifying low-rank sections. Major findings are as follows. Firstly, we confirmed that over 90% of all stock lending & borrowing transactions are performed by foreign traders, and that the traders utilized such transactions in various investment strategies such as short selling and program trading. Secondly, we observed, in stock lending & borrowing transactions, that redemption transactions are more heavily utilized rather than newly borrowed transactions during specific periods, and about 30% of newly borrowed transactions are applied to short-selling transactions. Thirdly, we formed portfolios with 60 most frequently traded stocks in lending & borrowing and estimated the differential earnings on those portfolios actually acquired by short selling with borrowed stocks until redemption. We found that the strategy of redeeming after 3 to 6 months from the point of short selling yielded the highest returns compared to other strategies. As a result, we conclude that the informational content associated with stock lending and borrowing transactions, as well as that associated with short selling, is sufficient. We also validate the hypothesis that investors armed with superior information and analytical skills can achieve superior rates of return through stock lending and borrowing transactions as well as through short selling.