41 Pages Posted: 28 Jan 2010 Last revised: 16 Jul 2014
Date Written: July 16, 2014
Informed investors have been shown to strategically break up their larger trades into smaller trades in order to disguise their information (Kyle, 1985, Barclay and Warner, 1993, and Alexander and Peterson, 2007). In this paper, we consider informed trading strategies when investors face borrowing costs. Borrowing costs may induce more intense trading and increase the use of unusually large trade sizes. Using data which consists of a subset of trades that are both informed and face borrowing costs, we test this assertion empirically. Following prior work that documents that short sales contain information about future stock prices, we show that the most informed short sales are driven primarily by large, unrounded short sales in stocks that are most likely to face higher equity borrowing costs.
Keywords: Informed Trading, Borrowing Costs, Stealth Trading, Short Selling, Signaling
JEL Classification: G10, G14
Suggested Citation: Suggested Citation