I Don't Recall: Information and the Governance Tradeoffs in Securities Lending

Institutional investors are commonly viewed as facing a tradeoff between revenue and voting power when lending shares. However, lending also generates valuable voting information via the borrowing demand of informed short sellers.  I develop a model in which lenders trade off revenue, voting power, and information, and derive novel implications for corporate governance. Contrary to conventional wisdom, expected firm value can suffer when lenders recall shares to cast extra votes, since doing so discourages borrowing ex-ante and thereby reduces the informativeness of those votes; the key governance tradeoff is between a larger number of less informed votes and a smaller number of more informed votes. Thus, share lending and voting are not necessarily substitutes — they can also be complementary.