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Informed Trading Strategies with Borrowing Costs

41 Pages Posted: 28 Jan 2010 Last revised: 16 Jul 2014

Benjamin M. Blau

Utah State University - Huntsman School of Business

Jason M. Smith

Utah State University

Date Written: July 16, 2014

Abstract

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

Blau, Benjamin M. and Smith, Jason M., Informed Trading Strategies with Borrowing Costs (July 16, 2014). Available at SSRN: https://ssrn.com/abstract=1543290 or http://dx.doi.org/10.2139/ssrn.1543290

Benjamin M. Blau (Contact Author)

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322
United States

Jason M. Smith

Utah State University ( email )

Logan, UT 84322
United States

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