Information asymmetry, information attributes and industry sector returns

Purpose: We examine whether the probability of informed trade (PIN), a microstructure measure of information asymmetry, influences stock returns in Australia. Originality: We provide evidence of PIN’s price effect in a market which is significantly different, in its information attributes, to the U.S. markets the subject of most of the existing empirical studies. We consider the differential pricing effect among sectors/categories of stocks that are distinguished by characteristics known to influence a firm’s information environment. Key literature/theoretical perspective: Recent theory proposes that stocks with a high proportion of private information should have expected returns greater than those with a greater proportion of public information. However, empirical studies which use PIN as a proxy for the risk of privately informed trade, raise question as to whether PIN is priced and, if it is, whether the result is attributable to the information asymmetry that one associates with some investor(s) holding a private information advantage over others.