Securities Lending, Shorting, and Pricing

We present a model of asset valuation in which short-selling is achieved by searching for security lenders and by bargaining over the terms of the lending fee. If lendable securities are di cult to locate, then the price of the security is initially elevated, and expected to decline over time. This price decline is to be anticipated, for example, after an initial public o ering (IPO), among other cases, and is increasing in the degree of heterogeneity of beliefs of investors about the likely future value of the security. The initial price of a security may be above even the most optimistic buyer's valuation of the security's future dividends, because of the additional prospect of lending fees for owners