Informed Trading Before Positive vs. Negative Earnings Surprises

42 Pages Posted: 16 Mar 2012

See all articles by Kyojik Song

Kyojik Song

Sungkyunkwan University

Tae-Jun Park

Korea Securities Research Institute (KSRI)

Date Written: March 15, 2012

Abstract

This paper investigates whether institutional investors trade profitably around earnings announcements. We argue that institutions have informational advantage before negative earnings surprises but not before positive earnings surprises since the positive news tend to leak to market before the event. Using unique Korean data over the period of 2001-2010, we find that trading volume decreases only before the negative event due to information asymmetry among investors. We also find that institutions sell the stock before the negative earnings surprises but individual investors do not anticipate the bad news, and that trade imbalance by the institutions is positively related to the announcement abnormal returns of the negative events. The evidence is consistent with our conjecture that the domestic institutions exploit their superior information around the negative earnings surprises. Our results also show that foreign investors do not have any informational advantage compared to local investors on the upcoming earnings news.

Keywords: Information Asymmetry, Earnings surprises, Trading volume, Trade imbalance, Institutional investors

JEL Classification: G10, G30

Suggested Citation

Song, Kyojik and Park, Tae-Jun, Informed Trading Before Positive vs. Negative Earnings Surprises (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2022999 or http://dx.doi.org/10.2139/ssrn.2022999

Kyojik Song (Contact Author)

Sungkyunkwan University ( email )

53 Myeongnyun-dong 3-ga Jongno-ju
Guro-gu
Seoul, 110-745
Korea, Republic of (South Korea)
82-2-760-0497 (Phone)

Tae-Jun Park

Korea Securities Research Institute (KSRI) ( email )

33 Youido-dong Youngdungpo-gu
150-977 Seoul
Korea

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