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Prime (information) brokerage

Author

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  • Kumar, Nitish
  • Mullally, Kevin
  • Ray, Sugata
  • Tang, Yuehua

Abstract

We show that hedge funds gain an information advantage from their prime broker banks regarding the banks’ corporate borrowers. The connected hedge funds make abnormally large trades in the stocks of borrowing firms prior to loan announcements, and these trades outperform other trades. The outperformance is particularly strong for trades of hedge funds that have high revenue potential for prime broker banks. These informed trades appear to be based on information not just about the loan itself but also about firms’ fundamentals such as future earnings. Finally, we find evidence suggesting that equity analysts inside the banks are one potential conduit of information transfer.

Suggested Citation

  • Kumar, Nitish & Mullally, Kevin & Ray, Sugata & Tang, Yuehua, 2020. "Prime (information) brokerage," Journal of Financial Economics, Elsevier, vol. 137(2), pages 371-391.
    • Handle: RePEc:eee:jfinec:v:137:y:2020:i:2:p:371-391
    DOI: 10.1016/j.jfineco.2020.02.010
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    1. David C. Ling & Chongyu Wang & Tingyu Zhou, 2021. "Institutional common ownership and firm value: Evidence from real estate investment trusts," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(1), pages 187-223, March.
    2. Sinclair, Andrew J., 2023. "Do prime brokers intermediate capital?," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    3. Chung, Sung Gon & Kulchania, Manoj & Teo, Melvyn, 2021. "Hedge funds and their prime broker analysts," Journal of Empirical Finance, Elsevier, vol. 62(C), pages 141-158.
    4. Huang, Yin-Siang & Bui, Dien Giau & Lin, Chih-Yung & Robin,, 2022. "The effect of abnormal institutional attention on bank loans," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).
    5. Mullally, Kevin A., 2022. "Outside ownership in the hedge fund industry," Journal of Banking & Finance, Elsevier, vol. 144(C).
    6. He, Jing & Lee, Dongyoung, 2023. "Say more to return less? Disclosure subsequent to successful technological innovation," Journal of Empirical Finance, Elsevier, vol. 70(C), pages 403-426.
    7. Zou, Yang & Wang, Xiaoming, 2022. "Distance, information and bank lending in China," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    8. Kruttli, Mathias S. & Monin, Phillip J. & Watugala, Sumudu W., 2022. "The life of the counterparty: Shock propagation in hedge fund-prime broker credit networks," Journal of Financial Economics, Elsevier, vol. 146(3), pages 965-988.
    9. Gjergji Cici & Philip B. Shane & Yanhua Sunny Yang, 2024. "Do buy‐side analysts inform sell‐side analyst research?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(1), pages 657-691, March.

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    More about this item

    Keywords

    Hedge funds; Prime brokers; Investment banks; Informed trading; Loan originations;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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