Does corporate ownership impact the probability of informed trading?

Abstract

As individuals or families hold a substantial share of a firm at the cost of less diversified portfolio, they specialize their portfolio and have better inside information. Does the market marker react to this fact and maintain higher level of asymmetric information cost for such family-controlled firms? We analyze the bid-ask spread and the probability of informed trading (PIN) of Canadian-based publicly traded firms cross-listed with NYSE/AMEX to test this notion. We find that although the market maker maintains higher average spread, he does not form higher PIN for family-controlled firms when the entire day is considered as an event period. The assumption of constant arrival rates of informed and uninformed traders during the day in Easley et al (1996b) is rejected in the two periods per day analysis. In addition, the notion of information event occurrence prior to the day in Easley et al (1996b) is consistently rejected as higher (non-statistically) probability of information events is found in the afternoon (second session) in the two (three) periods per day analyses, respectively. Based on these findings, we have serious doubts about any existing findings (including ours) of PIN based on one period per day. As such, we consider the possibility of several periods per day.Though it remains an empirical question to choose how many periods should be considered, we find our results using two and three periods per day to be very interesting. We consistently reject the hypothesis that the PIN is higher for family-controlled firms. Since the market maker does not need to maintain high spread for firms with very high number of uninformed traders and very low number of informed traders, we do not perceive our findings to be either surprising or contradictory to the present literature. By developing a different formulation of PIN, we also show that this is empirically less than that developed by Easley et al (1996b).