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Prime (information) brokerage

Author

Listed:
  • 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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    More about this item

    Keywords

    Hedge funds; Prime brokers; Investment banks; Informed trading; Loan originations;

    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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