Short Selling and Inside Information

Using data on all lending deals in the Brazilian stock market from 2009 to 2011, we provide answers to: i) are short-sellers informed in Brazil?, ii) which short sellers are informed?, and iii) how are short sellers informed? The answer to the first question is positive, the Brazilian short-seller is informed. Among short-sellers, individual investors are the most informed ones followed by investment funds. As to how they short-sell, we show that funds tend to short-sell on the days and the day after news releases, an indication that funds short-sell after processing news. On the other hand, individual investors increase short-selling activity in advance of bad news and decrease short-selling activity prior to good news. We take this as a strong indication of inside information trading in the short selling market.