When is a firm's information asymmetry priced? The role of institutional investors

This study reexamines the competing claims that probability of informed trading (PIN) is priced in the cross-section of stock returns while adjusted PIN (AdjPIN), the component of PIN related to information asymmetry, is not. We find that behind these seemingly contradicting conclusions is the role of institutional investors, and the pricing of PIN and AdjPIN depends on institutional ownership. Only for those stocks with low institutional ownership are both PIN and AdjPIN priced. Our findings imply that investors require compensation for information risk only from stocks with low institutional ownership.