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Narelle Gordon

First Name: Narelle
Surname: Gordon
Department Dept of Applied Finance and Actuarial Studies
Supervisor(s): Doctor Edward Watts , Doctor Qiongbing (Linda) Wu

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Paper Title

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 PINís 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 firmís 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.

Design/methodology/approach

We use portfolio sorts and cross sectional asset-pricing tests where monthly excess stock returns are regressed on PIN, controlling for other factors known to influence returns.

Findings

We find PIN has a strong price-effect among Industrial sector stocks but not among Resources sector stocks and among stocks without an established record of operating revenue.

Research limitations/implications

Our findings suggest that PIN is not universally priced; caution is needed when applying PIN in the pricing of highly speculative stocks.

Keywords

Information asymmetry, information attributes, probability of informed trade, PIN, industry sector returns