Prime (information) brokerage

Nitish Kumar, Kevin Mullally, Sugata Ray and Yuehua Tang

Journal of Financial Economics, 2020, vol. 137, issue 2, 371-391

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.

Keywords: Hedge funds; Prime brokers; Investment banks; Informed trading; Loan originations (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G23 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:137:y:2020:i:2:p:371-391

DOI: 10.1016/j.jfineco.2020.02.010

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