Edward J. Watts

The High Volume Return Premium and Changes in Investor Recognition

Utilising unique shareholding data for Australian equities we examine whether the high volume return premium (‘HVRP’) is associated with changes in investor recognition as has been posited in various empirical studies. We confirm the existence of the premium in Australia as stocks which experience unusually high volume over a day significantly outperform stocks which experience unusually low volume. The premium is strongest in the first two weeks following the extreme volume event and among stocks with recent poor return performance. However, we show the HVRP is more likely attributable to divergent opinions than to the changes in risk-sharing that underline the pricing-effects of Merton’s (1987) investor recognition hypothesis. Specifically, the premium exists irrespective of increases or decreases in the breadth of ownership of a stock around the extreme volume event, and irrespective of shifts in investor numbers between individuals and institutions. Evidence that high volume stocks which attract more institutional (individual) investors but fewer individuals (institutions), show the highest (lowest) returns following the extreme volume event, suggests the premium in part may relate to superior stock selection or a private information advantage among institutional investors.

Information Asymmetry, Information Attributes and Industry Sector Returns

We examine whether the probability of informed trading (‘PIN’) is a determinant of stock returns in Australia, an alternative market with considerably different information attributes to the U.S. Uniquely, we contrast PIN’s price effect for the country’s historically dichotomous sectors, resources and industrials. Using data for the period from 1996 to 2010, we find a significantly positive relationship between PIN and expected returns among industrials sector stocks, providing evidence in support of Easley and O’Hara (2004). We observe no PIN premium among resources sector stocks and among those with no record of operating revenues, both notable for their speculative nature and uncertainty about true asset values. Our results are consistent with previous empirical evidence that documents strong investor behavioural biases in valuing extremely uncertain stocks or hard-to-value stocks (Kumar, 2009). Our findings shed light on the existing mixed evidence that a strong PIN premium exists in NYSE and AMEX but not in NASDAQ where high-tech stocks are prevalent, and suggest that caution is needed when applying PIN in the pricing of highly speculative stocks.