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The relationship between the frequency of news release and the information asymmetry: The role of uninformed trading

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  • Sankaraguruswamy, Srinivasan
  • Shen, Jianfeng
  • Yamada, Takeshi

Abstract

This paper shows that the degree of information asymmetry is lower for firms with more frequent news releases. The relation holds for various measures of information asymmetry such as the probability of information-based trading (PIN), permanent price impact, and adverse selection component of bid-ask spread, even after adjusting for endogeneity between news release and information asymmetry. By decomposing the PIN into intensities of uninformed and informed trades, similarly to Brown and Hillegeist (2007), we find that intensity of uninformed trading increases much more than that of informed trading for firms with more frequent news releases. As a result, information asymmetry, as is measured by PIN, decreases for such firms due to the large increase in the intensity of uninformed trading. Our findings highlight not only the importance of news releases in leveling the playing field of investors but also the role of uninformed investors in reducing trading cost due to information asymmetry.

Suggested Citation

  • Sankaraguruswamy, Srinivasan & Shen, Jianfeng & Yamada, Takeshi, 2013. "The relationship between the frequency of news release and the information asymmetry: The role of uninformed trading," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4134-4143.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:11:p:4134-4143
    DOI: 10.1016/j.jbankfin.2013.07.026
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    2. Ignacio Arango & Diego A. Agudelo, 2017. "How does information disclosure affect liquidity?Evidence from an Emerging Market," Documentos de Trabajo de Valor Público 16990, Universidad EAFIT.
    3. Yanyi Ye & Yun Wang & Xiaoguang Yang, 2022. "Bank loan information and information asymmetry in the stock market: evidence from China," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-28, December.
    4. Agudelo, Diego A. & Giraldo, Santiago & Villarraga, Edwin, 2015. "Does PIN measure information? Informed trading effects on returns and liquidity in six emerging markets," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 149-161.
    5. Yang, Ann Shawing, 2020. "Misinformation corrections of corporate news: Corporate clarification announcements," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    6. Diego A. Agudelo & Ignacio Arango, 2017. "How does information disclosure affect liquidity? Evidence from an Emerging Market," Documentos de Trabajo de Valor Público 16944, Universidad EAFIT.
    7. Priyanka Naik & B G Poornima & Y V Reddy, 2020. "Measuring liquidity in Indian stock market: A dimensional perspective," PLOS ONE, Public Library of Science, vol. 15(9), pages 1-17, September.
    8. Aman, Hiroyuki & Moriyasu, Hiroshi, 2017. "Volatility and public information flows: Evidence from disclosure and media coverage in the Japanese stock market," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 660-676.
    9. Van Ha Nguyen & Frank W Agbola & Bobae Choi, 2019. "Does corporate social responsibility reduce information asymmetry? Empirical evidence from Australia," Australian Journal of Management, Australian School of Business, vol. 44(2), pages 188-211, May.
    10. Arango, Ignacio & Agudelo, Diego A., 2019. "How does information disclosure affect liquidity? Evidence from an emerging market," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    11. Zhang, Xiaotao & Wang, Ziqiao & Hao, Jing & He, Feng, 2022. "Price limit and stock market quality: Evidence from a quasi-natural experiment in the Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    12. Mamatzakis, Emmanuel & Zhang, Xiaoxiang & Wang, Chaoke, 2016. "Invisible hand discipline from informed trading: Does market discipline from trading affect bank capital structure?," MPRA Paper 76215, University Library of Munich, Germany.
    13. Gao, Yang & Wang, Yaojun & Wang, Chao & Liu, Chao, 2018. "Internet attention and information asymmetry: Evidence from Qihoo 360 search data on the Chinese stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 510(C), pages 802-811.
    14. Yan Han & Xin Cui & Gloria Y. Tian & Peipei Wang, 2023. "Bayesian Investor Belief Updating Speed and Market Underreaction to Earnings Announcements," Australian Accounting Review, CPA Australia, vol. 33(1), pages 66-85, March.
    15. Samie Ahmed Sayed & Latha Sreeram, 2017. "Factors Mitigating Firm-specific Information Asymmetry and Target Price Accuracy in India," Vikalpa: The Journal for Decision Makers, , vol. 42(4), pages 220-233, December.
    16. Likittanawong Supawat & Leemakdej Arnat, 2023. "Market Reaction to Corporate Releases and News Articles: Evidence from Thailand’s Stock Market," IJFS, MDPI, vol. 11(3), pages 1-27, September.
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    18. Xiao, Xijuan & Yamamoto, Ryuichi, 2024. "Overnight earnings announcements and preopening price discovery," Japan and the World Economy, Elsevier, vol. 70(C).
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    20. Cosmin Octavian Cepoi & Victor Dragotă & Ruxandra Trifan & Andreea Iordache, 2023. "Probability of informed trading during the COVID-19 pandemic: the case of the Romanian stock market," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-27, December.

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    More about this item

    Keywords

    News release; Information asymmetry; PIN; Uninformed trading;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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