Leveraged trading and stock returns: Evidence from international stock markets

Abstract

Are margin traders as well-informed as short sellers when it comes to leveraged investing? Our paper, utilizing a unique dataset on stock-level short selling and margin trading from three international stock markets, reveals that while short selling has cross-sectional return predictability, margin trading does not. In comparison to short selling, margin-trading activities demonstrate a stronger correlation across stocks and weakly predict firm fundamentals. This suggests that margin traders are less likely to possess a firm-specific information advantage. Our findings at the investor account level also indicate that margin traders are less sophisticated than short sellers.