Measuring and Explaining the Probability of Informed Trading and its Relationship with the Cost of Capital with an Emphasis on Family Ownership

Document Type: Research Paper

Authors

1 Department of Accounting, Borujerd branch, Islamic Azad University, Borujerd, Iran

2 Department of Accounting, Borujerd branch, Islamic Azad University, Borujerd, Iran.

10.22075/ijnaa.2020.4525

Abstract

One of the most important topics studied in the field of market microstructures is to measure information asymmetry in the capital market. In recent years, the Probability of Informed Trading (PIN) has been introduced to measure information asymmetry. The use of private information in stock exchanges reduces stock liquidity, thereby increasing the cost of equity capital. The main purpose of this study is to investigate the relationship between the probability of informed trading and cost of capital as well as to examine the moderating role of family ownership in the relationship between the probability of informed trading and cost of capital in 113 companies listed on the Tehran Stock Exchange during 2012-2016.
The independent variable of information asymmetry is measured by the probability of informed trading criterion and the dependent variable of cost of capital by the criterion of cost of equity and cost of debt, and the weighted average cost of capital, and the moderating variable is family ownership. The research method is correlational and the multivariate regression using combined data with fixed effect regression model approach is used.
The research findings show that there is a positive and significant direct relationship between the probability of informed trading with the cost of equity and the weighted average cost of capital, as well as the variable of family ownership has a positive and significant direct effect on the relationship between the probability of informed trading and the weighted average cost of capital.
When the probability of trading by private information holders increases, due to the increase in information asymmetry between informed and uninformed investors, uninformed investors demand higher returns to cover the investment risk, thereby increasing the company's cost of capital. This will increase the cost of financing through bonds.

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