Trading Responses to Analyst Reports by Investor Types: Korean Evidence

Abstract

Using trading data from the Korean equity market, where individual investors are active, we investigate whether there is any difference amongst individual investors, domestic institutional investors and foreign institutional investors in trading responses to analyst reports. We also examine the determinants of the trading responses of each investor type to analyst reports where we use firm characteristics as well as analyst characteristics as the determinants of the release date trading volumes of each investor type. Our findings are as follows. First, individual investors are the most responsive investor group to the analyst reports suggesting that institutional investors (domestic and foreign) perceive analyst reports to be less informative than do the individual investors. In particular, individual investors respond to information on small to medium sized firms as well as optimistic forecasts suggesting that they tend to be the proverbial “suckers” of the market. Second, domestic institutional investors increase trading volumes for neglected firms characterized by large information asymmetry and firms with high volatility. Furthermore, the increase in trading volume by domestic institutional investors occurs prior to the release date of analyst reports, suggesting that domestic institutional investors are informed traders. Third, foreign institutional investors do not show meaningful responses to research reports by local analysts suggesting that foreign institutional investors do not find the information provided by local analysts informative. Our findings overall suggest that the research analysts act primarily as information transmitter repackaging disclosed information in the Korean market.