Short selling and the pricing of PIN information risk

Chen Chen, Qiqi Liang, Chris Stivers and Licheng Sun

Journal of Financial Markets, 2024, vol. 71, issue C

Abstract: We present evidence that the pricing of the probability of informed trading (PIN) information risk varies substantially with stocks’ short selling environment. For lightly shorted stocks, their risk-adjusted returns (alphas) increase reliably with both the good news (PIN_G) and bad news (PIN_B) components of their PIN. The positive PIN-alpha relations decline and then disappear as stocks’ shorting activity increases. Our findings are consistently evident with shorting-interest, shorting-flow, and the probability of informed shorting, and are more prominent for smaller-cap stocks. Our findings support theories where asymmetric information with imperfectly competitive markets can impact stocks’ cost of equity.

Keywords: Short sales; Probability of informed trading; Information asymmetry (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:71:y:2024:i:c:s1386418124000491

DOI: 10.1016/j.finmar.2024.100931

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