Information asymmetry, information attributes and industry sector returns

The probability of informed-trading (PIN), a microstructure measure of information asymmetry developed by Easley, et al (1996), has been increasingly applied to empirical studies in asset pricing, corporate finance and market microstructure. However, there is a growing debate as to whether PIN is a determinant of asset returns given the mixed empirical evidence from the US markets. We contribute to this debate by examining the price effect of PIN in an alternative market with significantly different information attributes to the US markets. Using data for companies listed on the Australian Stock Exchange (ASX) over the period from 1996 to 2010, we find that PIN is weakly priced in the Australian market. However, unlike the US market, the Australian market has an abundance of stocks from the resources sector. After excluding the resources stocks from the sample, we find a significantly positive relationship between PIN and expected stock returns, providing evidence in support of Easley et al (2004). Shedding light on the weak relationship between PIN and expected returns in the resources sector, we provide evidence stocks with no record of operating revenues, highly speculative stocks, show no association between PIN and expected returns. These findings are also consistent with previous empirical evidence that documents strong investor behavioural biases in valuing extremely uncertain stocks or hard-to-value stocks (Kumar, 2009). Therefore, caution is needed when applying PIN in the pricing of highly speculative stocks.