Abstract
We decompose PIN, the probability of informed trading, into good-news (PIN-G) and bad-news (PIN-B) components, which we estimate at a quarterly frequency. We first assess the validity of PIN as a measure of informed trading by calculating its association with measures of the adverse-selection component of the cost of trading. We then provide new evidence that PIN-G and PIN-B capture informed trading around earnings announcements by showing that they predict positive and negative earnings surprises, respectively. Conjecturing that investors who take long positions will be more concerned about informed selling than about informed buying since the former depresses the sale price whereas the latter raises it, we then investigate asymmetry in the pricing of private information. We find strong evidence of such asymmetry in that the effect of PIN-B on the cost of equity capital is large and highly significant, whereas the effect of PIN-G is small and statistically insignificant.
| Original language | English |
|---|---|
| Pages (from-to) | 2460-2480 |
| Number of pages | 21 |
| Journal | Management Science |
| Volume | 62 |
| Issue number | 9 |
| DOIs | |
| State | Published - Sep 2016 |
Keywords
- AdjPIN
- Adverse-selection and noninformation components of trading costs
- CAR
- Cost of equity capital
- Decomposition of PIN
- Earnings announcements
- Earnings surprises
- Information asymmetry
- PIN-B
- PIN-G
- PSOS
- SUE
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