Does information risk affect the implied cost of equity capital? An analysis of PIN and adjusted PIN

Lee-Seok Hwang, Woo-Jong Lee, Seung-Yeon Lim and Kyung-Ho Park

Journal of Accounting and Economics, 2013, vol. 55, issue 2, 148-167

Abstract: Using a unique dataset of Korean listed companies for which trade initiators are correctly identifiable, we estimate bias-free PIN (probability of informed trading) that is no longer subject to the trade misspecification problem and test whether it is related to expected returns. Unlike prior studies, we find that bias-free AdjPIN, the adjusted PIN purged of a liquidity component, is positively related to implied cost of equity. Our findings suggest that the errors in PIN variables hamper a proper identification of PIN pricing in prior studies.

Keywords: Probability of informed trading (PIN); Adjusted PIN (AdjPIN); Implied cost of equity capital; Expected returns; Analysts' forecasts (search for similar items in EconPapers)
JEL-codes: D82 G12 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:55:y:2013:i:2:p:148-167

DOI: 10.1016/j.jacceco.2013.01.005

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