We propose that the arrival of new information is a source of systematic risk for the holder of a financial security. Using several measures of information flows, we demonstrate that a stock’s sensitivity to market-wide information flow is associated with a robust cross-sectional return premium that is distinct from other return premia. We find that the amount of information impounded in prices through trading has increased in recent years consistent with declining trading costs and the rise of algorithmic trading. We show that the information flows risk premium is increasing through time.

Almost half of US share trading volume occurs in dark markets, prompting regulatory concerns. We examine the effects of dark trading on issuers and show that, at moderate levels, dark trading improves the quality of corporate investment decisions by increasing the amount of information in prices that is new to managers. Consistent with this mechanism, higher dark trading is associated with greater investment–price sensitivity, improved managerial forecast accuracy, stronger M&A-price sensitivity, and superior future operating performance. These benefits diminish, and can reverse, at high levels of dark trading. We establish causality using exogenous changes in dark trading.