The Relationship between the Frequency of News Release and the Information Asymmetry: The Role of Uninformed Trading

39 Pages Posted: 3 Mar 2008 Last revised: 10 Dec 2013

See all articles by Srinivasan Sankaraguruswamy

Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting

Jianfeng Shen

UNSW Australia Business School, School of Banking and Finance

Takeshi Yamada

Australian National University (ANU)

Date Written: July 8, 2013

Abstract

This paper shows that the degree of information asymmetry is lower for firms with more frequent news releases. The relation holds for various measures of information asymmetry such as the probability of information-based trading (PIN), permanent price impact, and adverse selection component of bid-ask spread, even after adjusting for endogeneity between news release and information asymmetry. By decomposing the PIN into intensities of uninformed and informed trades, similarly to Brown and Hillegeist [2007, Review of Accounting Studies 12, 443-477], we find that intensity of uninformed trading increases much more than that of informed trading for firms with more frequent news releases. As a result, information asymmetry, as is measured by PIN, decreases for such firms due to the large increase in the intensity of uninformed trading. Our findings highlight not only the importance of news releases in leveling the playing field of investors but also the role of uninformed investors in reducing trading cost due to information asymmetry.

Keywords: News release, Information asymmetry, PIN, Uninformed trading

JEL Classification: G14, D82

Suggested Citation

Sankaraguruswamy, Srinivasan and Shen, Jianfeng and Yamada, Takeshi, The Relationship between the Frequency of News Release and the Information Asymmetry: The Role of Uninformed Trading (July 8, 2013). Journal of Banking and Finance, Vol. 37, 2013. Available at SSRN: https://ssrn.com/abstract=1100763 or http://dx.doi.org/10.2139/ssrn.1100763

Srinivasan Sankaraguruswamy (Contact Author)

National University of Singapore (NUS) - Department of Accounting ( email )

1 Business Link
Singapore, 117592
Singapore
+65 6874 4473 (Phone)
+65 6779 2083 (Fax)

Jianfeng Shen

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Takeshi Yamada

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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