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Informed trading before positive vs. negative earnings surprises

Author

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  • Park, Tae-Jun
  • Lee, Youngjoo
  • Song, Kyojik “Roy”

Abstract

This paper investigates whether institutional investors trade profitably around the announcements of positive or negative earnings surprises. Using Korean data over the period of 2001–2010, we find that information asymmetry is larger before negative earnings surprises (earnings shock) among investors and that the trading volume decreases only before earnings shock announcements due to the severe information asymmetry. We also find that institutions sell their stocks prior to earnings shock announcements whereas individual and foreign investors do not anticipate bad news. Finally, we find that institutional trade imbalance is positively related to the post-announcement abnormal returns of negative events. This study complements and extends prior literature on informed trading around earnings announcements by documenting evidence that domestic institutions exploit their superior information around particularly earnings shock announcements.

Suggested Citation

  • Park, Tae-Jun & Lee, Youngjoo & Song, Kyojik “Roy”, 2014. "Informed trading before positive vs. negative earnings surprises," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 228-241.
    • Handle: RePEc:eee:jbfina:v:49:y:2014:i:c:p:228-241
    DOI: 10.1016/j.jbankfin.2014.09.016
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    More about this item

    Keywords

    Information asymmetry; Earnings surprises; Trading volume; Trade imbalance; Institutional investors;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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