INFORMATION UNCERTAINTY AND EXPECTED RETURNS: CASE OF KOREAN STOCK MARKET

This study examines the effect of information uncertainty on expected returns and reports empirical evidence from the Korean stock market. Traditional theory predicts that investors require a premium for uncertainty risk, implying higher expected returns. However, prior studies based on U.S. data have documented the opposite pattern: firms with greater information uncertainty tend to earn lower actual returns. Previous research on momentum also suggests that firms with high information uncertainty rely more heavily on private than public information, which raises information-acquisition costs, constrains arbitrage, and may strengthen momentum through delayed market reactions and investor overconfidence. Motivated by this literature, this study investigates whether higher information uncertainty is associated with lower average returns and whether momentum is stronger under high uncertainty for Korean listed firms from 2001 to 2020. Three proxies are used to measure information uncertainty: firm age, trading volume, and return volatility. Portfolios are formed by uncertainty level and their returns are compared. The results indicate a negative relation between information uncertainty and expected returns, whereas the momentum effect is not statistically significant. This study contributes by providing one of the first Korean empirical examinations of lower returns and momentum under information uncertainty.