Leverage and Information: Are Short Sellers and Margin Traders Twin Sisters or Stepsisters?

As leveraged investors, are margin traders as informed as short sellers? Using a unique dataset on stock-level short selling and margin trading from three international stock markets, we find that margin trading has no cross-sectional predictability but short selling does. Compared to short selling, margin-trading activities exhibit stronger comovement across stocks and are weak predictors of firm fundamentals. This finding suggests that margin traders are less likely to have a firm-specific information advantage and that their trades tend to be driven by market-wide factors. Tests at the investor account level also show that participants in margin trading are less sophisticated than those who participate in short selling.