Information asymmetry and stock returns
Journal of Advances in Management Research
ISSN: 0972-7981
Article publication date: 10 August 2020
Issue publication date: 19 January 2021
Abstract
Purpose
This study endeavours to examine the relationship between information asymmetry and expected stock returns at the National Stock Exchange (NSE) of India, with a sample of NIFTY 500 stocks for a period ranging from 1st April 2000 to 31st March 2018, by employing three different proxies of information asymmetry: number of transactions, institutional ownership and idiosyncratic volatility.
Design/methodology/approach
The return differential amongst information-sorted decile portfolios has been assessed to understand the effect of information risk on stock returns by employing (1) traditional measures of performance evaluation like mean, Sharpe, Treynor and information ratios, (2) regression models like the capital asset pricing (CAPM), Fama and French three-factor, Carhart's four-factor, information-augmented CAPM, information-augmented Fama and French three-factor and information-augmented Carhart's four-factor models and (3) an autoregressive distributed lag (ARDL) model.
Findings
The empirical evidence indicated that as information asymmetry associated with portfolio increases, returns also expand to recompense investors for bearing information risk validating the existence of a significant positive relationship between information asymmetry and expected stock returns at the NSE. Amongst the various asset pricing models employed in this study, the information-augmented Fama and French three-factor model turned out to be the best in explaining cross-sectional variations in portfolio returns.
Research limitations/implications
Strong information premium was observed such that high information stocks outperformed low information stocks which have strong inference for investors and portfolio managers, who all continuously look out for investment strategies that can lend hand to beat the market.
Originality/value
Easley and O'Hara (2004) proposed that stocks with more information asymmetry have higher expected returns. Very few studies have examined this relationship between information risk and stock returns that too restricted to the US market only, with a few on other emerging markets. No work has been conducted on the concerned issue in the Indian context. Therefore, it seems to be the first study to explore the relationship between information asymmetry and expected stock returns in the Indian securities market.
Keywords
Citation
Goel, A., Tripathi, V. and Agarwal, M. (2021), "Information asymmetry and stock returns", Journal of Advances in Management Research, Vol. 18 No. 1, pp. 85-112. https://doi.org/10.1108/JAMR-05-2020-0084
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited