Informed Trading and Expected Returns
46 Pages Posted: 17 Jan 2013 Last revised: 25 Jan 2016
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Informed Trading and Expected Returns
Informed Trading and Expected Returns
Date Written: January 22, 2016
Abstract
Does information asymmetry affect the cross-section of expected stock returns? We explore this question using representative portfolio holdings data from the Shanghai Stock Exchange. We show that institutional investors have a strong information advantage, and that past aggressiveness of institutional trading in a stock positively predicts institutions’ future information advantage in this stock. Sorting stocks on this predictor and controlling for other correlates of expected returns, we find that the top quintile’s average annualized return in the next month is 10.8% higher than the bottom quintile’s, indicating that information asymmetry increases expected returns.
Keywords: Information asymmetry, Adverse selection, Cost of capital
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