This paper examines the trading behaviors of individual investors and domestic and foreign institutional investors around a unique corporate event: unfaithful disclosure (non-disclosure, cancelling disclosure, and changing disclosure of a firm’s material information). Our study relies on daily trading data of different groups of investors in Korea’s stock market. We find that the market reacts negatively towards announcements on forewarnings of unfaithful disclosure by Korea Exchange (KRX) and towards confirmation of the forewarnings. Also, our finding shows that firms proved to be responsible for the unfaithful disclosure tend to perform poorly before the announcement days of forewarnings. This implies that poorly performing firms are likely to have negative information and thus have incentives not to disclose or correctly disclose the bad news. In addition, our result shows that firms performing poorly before receiving the forewarnings subsequently perform poorly after confirmation of unfaithful disclosure, which is consistent with the incentives of unfaithful disclosure. Most importantly, we find that individual investors constantly buy the shares of firms receiving the forewarnings before its announcements while both domestic and foreign institutional investors sell them. Even after confirmation of unfaithful disclosure, individual investors continue to buy shares of unfaithful firms but domestic and foreign institutional investors sell them. Since institutional investors are considered to be better informed and/or more sophisticated investors than individual investors, this finding newly adds to the evidence of information asymmetry among different types of investors before news release and to the evidence of trading behaviors by individual investors unsophisticatedly following news release.
Keyword: Unfaithful Disclosure, Information Asymmetry, Investor Trading Behaviors
