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Short selling and the pricing of PIN information risk

Author

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  • Chen, Chen
  • Liang, Qiqi
  • Stivers, Chris
  • Sun, Licheng

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.

Suggested Citation

  • Chen, Chen & Liang, Qiqi & Stivers, Chris & Sun, Licheng, 2024. "Short selling and the pricing of PIN information risk," Journal of Financial Markets, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:finmar:v:71:y:2024:i:c:s1386418124000491
    DOI: 10.1016/j.finmar.2024.100931
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    Keywords

    Short sales; Probability of informed trading; Information asymmetry;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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