Informed Trading and Expected Returns
Does information asymmetry affect the cross-section of expected stock returns? We explore this question using representative portfolio holdings data from the Shanghai Stock Exchange. We show that institutional investors have a strong information advantage, and that past aggressiveness of institutional trading in a stock positively predicts institutions' future information advantage in this stock. Sorting stocks on this predictor and controlling for other correlates of expected returns, we find that the top quintile's average annualized return in the next month is 10.8% higher than the bottom quintile's, indicating that information asymmetry increases expected returns.
We thank Jennifer Carpenter, Jia Chen, Bryan Kelly, Alexander Ljunqvist, Roger Loh, Jialin Yu, and audience members at ABFER, Brigham Young University, Brown, Cheung Kong GSB, CICF, EFA, Hong Kong University, HKUST, INSEAD, NYU, the SEC, SUNY Binghamton, University of Rochester, University of Toronto, and Yale for their insightful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- Stocks with the greatest information asymmetry have annualized returns that are 10.8 percentage points higher than stocks with the least...