Firm Characteristics and Informed Trading: Implications for Asset Pricing
Georgia State University
Cornell University - Department of Economics
Copenhagen Business School
Cornell University - Samuel Curtis Johnson Graduate School of Management
September 1, 2008
This paper investigates the linkage of microstructure, accounting, and asset pricing. We determine the relationship between firm characteristics as captured by accounting and market data and a firm's probability of private information-based trade (PIN) as estimated from trade data. This allows us to determine what types of firms have high information risk. We then use these data to create an instrument for PIN, the PPIN, which we can estimate from firm-specific data. We show that PPINs have explanatory power for the cross-section of asset returns in long sample tests. We also investigate whether information risk vitiates the influence of other variables on asset returns. Our results provide strong support for information risk affecting asset returns, and suggest that PIN weakens, but does not remove, the role of size in asset returns.
Number of Pages in PDF File: 51
Date posted: January 29, 2009 ; Last revised: February 10, 2009
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