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. We find that idiosyncratic return variation can be induced by informed trade through the significant impact of information flow on price formation. We also find a significant interaction effect such that the impact of informed trade on return variation is more profound for stocks with a high trading volume than for stocks with a low trading volume. The robustness checks confirm that informed trade is an important determinant of firm-specific return variation