The Information in Industry-Neutral Self-Financed Trades

66 Pages Posted: 4 May 2020 Last revised: 25 Aug 2021

See all articles by Yashar H. Barardehi

Yashar H. Barardehi

Chapman University - The George L. Argyros School of Business & Economics

Zhi Da

University of Notre Dame - Mendoza College of Business

Mitch Warachka

Chapman University - The George L. Argyros School of Business & Economics

Date Written: April 29, 2020

Abstract

We identify Industry-Neutral Self-Financed Informed Trading (INSFIT) by long only fund managers who possess a positive short-horizon private signal. Stock purchases financed by equivalent dollar-denominated stock sales in the same industry are classified as informed by INSFIT. Despite constituting a small fraction of their trading activity, 37% of short-term fund trading profits are attributable to INSFIT. INSFIT also precedes more frequent and positive media coverage for the firms being bought. Relative valuation as well as the need to hedge industry exposure motivate INSFIT’s industry neutrality. Furthermore, INSFIT occurs more frequently among cash-constrained managers but is uncorrelated across fund managers. Although INSFIT involves relatively large dollar-denominated trades, transaction costs cannot account for its profitability.

Keywords: Informed Trading, Self Financing, Industry Neutral, Institutional Investors, Manager Skills

JEL Classification: G11, G14, G23

Suggested Citation

Barardehi, Yashar and Da, Zhi and Warachka, Mitch, The Information in Industry-Neutral Self-Financed Trades (April 29, 2020). Available at SSRN: https://ssrn.com/abstract=3584664 or http://dx.doi.org/10.2139/ssrn.3584664

Yashar Barardehi

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

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

Zhi Da

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Mitch Warachka (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

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