Information Revelation and Expected Stock Returns

If information is not perfect, theories prescribe a negative relation between information availability and expected stock returns. Using two readily available variables, price and volume, I construct a new proxy for information and test its relation to returns in the 1964-2007 period on NYSE-listed stocks. I find that information revelation predicts lower future returns, controlling for beta, size, book-to-market ratio, liquidity, and momentum. A long/short trading strategy based on sorts on the information proxy generates alphas of 3% to 4%. These alphas do not have to imply an arbitrage opportunity; they are consistent with time-varying expected returns in a rational model.