Working Paper: NBER ID: w31927
Authors: Fernando D. Chague; Bruno Giovannetti; Bernard Herskovic
Abstract: Using granular data on the entire Brazilian securities lending market merged with all trades in the centralized stock exchange, we identify information leakage from short sellers. Our identification strategy explores trading execution mismatches between short sellers’ selling activity in the centralized exchange and borrowing activity in the over-the-counter securities lending market. We document that brokers learn about informed directional bets by intermediating securities lending agreements and leak that information to their clients. We find evidence that the information leakage is intentional and that brokers benefit from it. We also study leakage effects on stock prices.
Keywords: information leakage; short sellers; securities lending; market efficiency; broker-client dynamics
JEL Codes: G12; G14; G23; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Broker's knowledge of the short seller's position (G24) | Dissemination of this information to clients (L86) |
| Information leakage (D82) | Faster drop in stock prices (G19) |
| Information leakage (D82) | Lower stock return volatility (G17) |
| Information leakage from brokers (D82) | Client trading behavior changes (G41) |