Information Asymmetry, Information Attributes and Industry Sector Returns

35 Pages Posted: 18 Aug 2012 Last revised: 11 Jul 2013

See all articles by Narelle Gordon

Narelle Gordon

Macquarie University; Macquarie University, Macquarie Business School

Edward J. Watts

Macquarie University, Macquarie Business School

Qiongbing Wu

Western Sydney University

Date Written: March 24, 2013

Abstract

We examine whether the probability of informed trading (‘PIN’) is a determinant of stock returns in Australia, an alternative market with considerably different information attributes to the U.S. Uniquely, we contrast PIN’s price effect for the country’s historically dichotomous sectors, resources and industrials. Using data for the period from 1996 to 2010, we find a significantly positive relationship between PIN and expected returns among industrials sector stocks, providing evidence in support of Easley and O’Hara (2004). We observe no PIN premium among resources sector stocks and among those with no record of operating revenues, both notable for their speculative nature and uncertainty about true asset values. Our results are consistent with previous empirical evidence that documents strong investor behavioural biases in valuing extremely uncertain stocks or hard-to-value stocks (Kumar, 2009). Our findings shed light on the existing mixed evidence that a strong PIN premium exists in NYSE and AMEX but not in NASDAQ where high-tech stocks are prevalent, and suggest that caution is needed when applying PIN in the pricing of highly speculative stocks.

Keywords: Informed Trade, PIN, Information Asymmetry, Information Risk

JEL Classification: G12, G14

Suggested Citation

Gordon, Narelle and Watts, Edward J. and Wu, Qiongbing, Information Asymmetry, Information Attributes and Industry Sector Returns (March 24, 2013). 25th Australasian Finance and Banking Conference 2012. Available at SSRN: https://ssrn.com/abstract=2131097 or http://dx.doi.org/10.2139/ssrn.2131097

Narelle Gordon (Contact Author)

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Edward J. Watts

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Qiongbing Wu

Western Sydney University ( email )

Locked Bag 1797
Penrith South DC, NSW 2751
Australia
+61-2-96859805 (Phone)
+61-2-96859105 (Fax)

HOME PAGE: http://www.uws.edu.au/staff_profiles/uws_profiles/doctor_linda_wu

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