NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Informed Trading and Expected Returns

James J. Choi, Li Jin, Hongjun Yan

NBER Working Paper No. 18680
Issued in January 2013
NBER Program(s):   AP

Does information asymmetry affect the cross-section of expected stock returns? Using institutional ownership data from the Shanghai Stock Exchange, we show that institutions have a strong information advantage over individual investors. We then show that the aggressiveness of institutional trading in a stock--measured by the average absolute weekly change in institutional ownership during the past year--is an ex ante predictor of future information asymmetry in this stock. Sorting stocks on this information asymmetry predictor, we find that the top quintile outperforms the bottom quintile next month by 10.8% annualized, suggesting that information asymmetry raises the cost of capital.

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Document Object Identifier (DOI): 10.3386/w18680

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