Prime (Information) Brokerage

74 Pages Posted: 18 Jul 2017 Last revised: 7 Aug 2019

See all articles by Nitish Kumar

Nitish Kumar

University of Florida

Kevin Mullally

University of Central Florida

Sugata Ray

University of Alabama - Department of Economics, Finance and Legal Studies

Yuehua Tang

University of Florida - Department of Finance

Date Written: August 5, 2019

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

JEL Classification: G11, G12, G14, G23

Suggested Citation

Kumar, Nitish and Mullally, Kevin and Ray, Sugata and Tang, Yuehua, Prime (Information) Brokerage (August 5, 2019). Available at SSRN: https://ssrn.com/abstract=2996148 or http://dx.doi.org/10.2139/ssrn.2996148

Nitish Kumar

University of Florida ( email )

Gainesville, FL 32611
United States

Kevin Mullally (Contact Author)

University of Central Florida ( email )

412 CBA
Orlando, FL 32827
United States
407-823-2360 (Phone)

Sugata Ray

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

Yuehua Tang

University of Florida - Department of Finance ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

HOME PAGE: http://sites.google.com/site/yuehuatang

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