We study whether institutional equity investors in the euro area follow public signals,
using confidential granular data on security holdings. We find that on a sectoral level all financial institutions, except banks, trade in line with public information, and thus the efficient market hypothesis. Examining possible drivers for the divergent behavior of individual banks, we find that banks adjust their holdings in line with buy/sell recommendations (i.e., follow public signals) more as they get larger, engage less in traditional lending business, or hold less diversified portfolios. Furthermore, better-performing banks follow public signals less. Next, we add bank-borrower relations and find that banks trade against public signals in stocks of their own clients. Finally, banks earn the highest trading profit if they go against a bad signal on a stock. Together, these results provide suggestive evidence that banks benefit from trading from private information obtained through lending.
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