Informed Trade, Uninformed Trade, and Stock Price Delay

Abstract

This paper examines how the probability of informed trading (PIN), a measure of information-based trading risk developed by Easley et al (1996), affects the speed at which stock prices adjust to market-wide information. We find that in all but the least active stock portfolios, prices of low PIN stocks are faster to impound market-wide news than those of high PIN stocks. PIN’s significance in explaining individual stock price delay is robust to the inclusion of size, liquidity and risk controls, but is subsumed by the level of uninformed trade. Our results suggest that low-PIN stock prices adjust to market information more rapidly as a result of a notably high level of informed trading as well as an even much higher level of uninformed trading, and the delayed response of high-PIN stock prices is primarily driven by the lack of uninformed trading. Our findings provide new empirical evidence regarding the channel through which trading affects the speed at which stock prices adjust to information, and support the notion that at least part of the informed trading captured by PIN relates to the skilled interpretation of public common factor information by sophisticated investors (Vega, 2006).

Keywords: Informed Trade, Uninformed Trade, PIN, Information Diffusion, Investor Recognition, Price Delay

JEL Classification: G12, G14