Wednesday, Dec 12, 2018     |  4:00pm-5:30pm | Room 335, HSBC Business School Building

Abstract

This paper documents that hedge funds gain an information advantage from their prime brokerage services-providing banks regarding the banks’ corporate borrowers. Hedge funds make informed trades in the stocks of firms that obtain loans from their prime-broker banks. The connected hedge funds make abnormally large trades prior to the loan announcement and these trades outperform other trades. The outperformance is particularly strong for (i) trades of hedge funds that have high revenue generation potential for prime brokers and (ii) trades in borrowing firms with high information asymmetry. Finally, we find that these informed trades are based on information regarding the borrowing firm in general, rather than just information about the loan.