Social norms and stock lending

We examine how social norms measured by religiosity influence institutional investors’ willingness to lend stock and constrain short selling in the U.S. markets. We find that firms with blockholders located in higher religiosity areas are associated with lower supply and higher utilization of lendable shares, but are not related to the demand for stock borrowing. Short interest, utilization rates, and lending fees, when combined with high blockholder religiosity, are stronger negative predictors of future stock returns. Our findings suggest that the social norms of institutional investors serve as a source of limits to arbitrage, which hinders market efficiency through stock lending.