The Information in Trade Financing

We identify informed trading by conditioning on how trades are financed. Our identification focuses on a subset of informed trading: Industry Neutral Self Financed Informed Trading (INSFIT). INSFIT is motivated by a long only fund manager with a positive short-lived private signal who self finances informed stock purchases by selling, on the same day, an equivalent dollar amount of stock in the same industry. INSFIT, which constitutes less than 1% of trading, produces a cumulative abnormal return spread of nearly 0.90% over the subsequent ten days. The industry neutral component of INSFIT is motivated by relative valuation as well as the need to maintain industry allocations and hedge industry exposure. The buy trades underlying INSFIT precede positive price jumps and high earnings announcement returns. INSFIT also 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.