Information Leakage from Short Sellers

Abstract

Directional bets by short sellers typically forecast future returns, but direct evidence of how other investors acquire information from these bets is nearly nonexistent. Using granular data on the entire Brazilian OTC security lending market and all trades in the Brazilian stock exchange, we explore institutional features of these markets to identify information leakage in security lending markets. When informed short sellers borrow securities, their broker learns about these informed directional bets by intermediating security lending contracts, and we document that brokers leak that information to their clients.

Keywords: short selling, security lending, brokers, information leakage

JEL Classification: G12, G14, G23, G24