With a year of equity loans by a major lender, we measure the effect of actual short-selling costs and constraints on trading strategies that involve short-selling. We find the loans of initial public offering (IPOs), DotCom, large-cap, growth and low-momentum stocks to be cheap relative to the strategies' documented profits and that investors who can short only stocks that are cheap and easy to borrow can enjoy at least some of the profits of unconstrained investors. Most IPOs are loaned on their first settlement days and throughout their first months, and the underperformance around lockup expiration is significant even for the IPOs that are cheap and easy to borrow. The effect of short-selling frictions appears strongest in merger arbitrage. Acquirers' stock is expensive to borrow, especially when the acquirer is small, though the major influence on trading profits is not through expense but availability. Disciplines Finance | Finance and Financial ManagementThis journal article is available at ScholarlyCommonsWith a year of equity loans by a major lender, we measure the effect of actual shortselling costs and constraints on trading strategies that involve short-selling. We find that wholesale costs of equity loans for shorting IPO's, DotComs, large-cap, growth and lowmomentum stocks are small relative to the documented benefit, and that investors who can short only stocks that are cheap and easy to borrow can closely track the returns of unconstrained investors. Most IPO's are loaned on their first settlement days and throughout their first months, and the underperformance around lockup expiration is significant even for the subset of stocks that are cheap and easy to borrow. The effect of short-selling frictions appears strongest with merger arbitrage. Acquirers' stock is expensive to borrow, especially acquirers with small market capitalizations. The additional cost paid in merger arbitrage positions does not significantly affect profits, but the shortage of available issues reduces profits by more than half.

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We present evidence that fund managers inflate quarter-end portfolio prices with last-minute purchases of stocks already held. The magnitude of price inflation ranges from 0.5 percent per year for large-cap funds to well over 2 percent for small-cap funds. We find that the cross section of inflation matches the cross section of incentives from the flow/performance relation, that a surge of trading in the quarter's last minutes coincides with a surge in equity prices, and that the inflation is greatest for the stocks held by funds with the most incentive to inflate, controlling for the stocks' size and performance. Leaning for the Tape: Evidence of Gaming Behavior In Equity Mutual Funds AbstractWe show that quarter-end prices of equity funds are inflated, presenting a large profit opportunity to potential sellers and an equivalent hazard to buyers and remaining shareholders. The magnitude of price inflation ranges from 50 basis points per year for large-cap funds to well over 200 basis points for small-cap funds. Evidence suggests that fund managers cause the inflation with last-minute purchases of stocks already held, deliberately moving performance to one period from the next. We find that the cross section of inflation matches the cross section of incentives from the flow/performance relation, that a surge of trading in the quarter's last minutes coincides with a surge in equity prices, and that the inflation is greatest for the stocks held by the funds with most incentive to inflate, controlling for the stocks' size and performance.

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