Information Asymmetry About the Firm and the Permanent Price Impact of Trades: Is There a Connection?

Abstract:     
We investigate whether permanent price impact measures describing intra-day price movements are helpful in characterizing information asymmetry about the fundamentals of firms. We conduct an event study of the Russell 1000 index reconstitution and find that the permanent price impact measures change around the event despite the fact that Russell 1000 membership is based on market capitalization and therefore the event is not associated with any change in private information about the firms. We also examine a large cross-sectional sample and find that the permanent price impact measures do not consistently reflect uncertainty about future earnings or relate to price informativeness about future earnings in a manner that is compatible with their use as proxies for information asymmetry about firms’ fundamentals.

Number of Pages in PDF File: 48

working papers series