Information Asymmetry and Cross-Sectional Returns: A Re-Examination of the Relationship between Stock Return and the Adjusted Probability of Informed Trading

43 Pages Posted: 31 Jan 2015 Last revised: 24 Feb 2015

See all articles by Shaojun Zhang

Shaojun Zhang

Hong Kong Polytechnic University

Yuxing Yan

SUNY at Geneseo - John Wiley Jones School of Business

Date Written: February 24, 2015

Abstract

We re-examine the relationship between stock return and the adjusted probability of informed trading (AdjPIN) for about 40,000 firm-years of NYSE/AMEX listed firms. We obtain two AdjPIN estimates for each firm-year pair: the first is estimated with all daily observations in the year, while the second is estimated after excluding 20 daily observations around each earnings announcement date. On average, the second estimate is greater than the first one. The difference between these two estimates is significantly smaller for firms that have large market capitalization or are actively traded. With both sets of estimates, the Fama-MacBeth regression analysis shows a significant and positive relationship between stock return and AdjPIN in the period between 1984 and 2005. Our findings support that information asymmetry in itself plays a role in explaining the cross-section of stock returns, though its effect appears to vary across time periods.

Keywords: Adjusted PIN; Earnings announcements; Information asymmetry; Probability of informed trading

JEL Classification: C13, C61, G12, G14

Suggested Citation

Zhang, Shaojun and Yan, Yuxing, Information Asymmetry and Cross-Sectional Returns: A Re-Examination of the Relationship between Stock Return and the Adjusted Probability of Informed Trading (February 24, 2015). Asian Finance Association (AsianFA) 2015 Conference Paper, Available at SSRN: https://ssrn.com/abstract=2558402

Shaojun Zhang (Contact Author)

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

Yuxing Yan

SUNY at Geneseo - John Wiley Jones School of Business ( email )

Geneseo, NY 14454
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
14
Abstract Views
171
PlumX Metrics