The Impact of Informed Trade on Firm-Specific Return Variation

Based on the notion that private information necessarily accompanies trade and leads to return variation, this paper explores the positive relationship between informed trade and firm-specific return variation. Using the PIN as a measure of informed trade, we find that the PIN is positively related to firm-specific return variation. We also find a significant interaction effect such that the impact of informed trade on firm-specific return variation is more profound for stocks with a high trading volume than for stocks with a low trading volume. The results of various robustness checks confirm that informed trade is indeed an important determinant of firm-specific return variation