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.
Choi, James J. and Jin, Li and Yan, Hongjun, Informed Trading and Expected Returns (January 22, 2016). Available at SSRN: https://ssrn.com/abstract=2193733 or http://dx.doi.org/10.2139/ssrn.2193733