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Do Domestic Institutional Trades Exacerbate Information Asymmetry? Evidence from the Korean Stock Market

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Abstract

We analyze a trading dataset from the Korean stock market, a representative and leading emerging equity market, to study the impact of domestic institutional trades on information asymmetry. Using the bid–ask spread as a proxy for the adverse selection cost imposed by information asymmetry, we empirically examine the relationship between domestic institutional trades and their corresponding bid–ask spreads. We find that bid–ask spreads tend to increase when the trading volume of domestic institutional investors is high, suggesting that such investors tend to aggravate information asymmetry as informed traders in the Korean stock market.

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Notes

  1. In particular, Chiang and Venkatesh (1988), Choi et al. (2013), Fehle (2004) and Kini and Mian (1995) suggest a relationship between ownership structure and information asymmetry measured by the bid–ask spread size.

  2. See Azari et al. (2016), Han et al. (2015b), Lee et al. (2016), Ryu et al. (2016, 2017b), Shim et al. (2016) and Song et al. (2016) for further details.

  3. According to the Korean Exchange, individual trading volume accounts for more than half of the total trading volume in our sample period.

  4. The literature typically supports the view that individual investors access private information inadequately and have poor information-processing capabilities owing to psychological biases. See, for example, Amihud and Li (2006), Barber and Odean (2000), Choi and Sias (2012), Chung et al. (2016), Cohen et al. (2002), Gibson et al. (2004), Grinblatt and Keloharju (2000), Han et al. (2015a), Kim and Ryu (2015), Kim et al. (2015), Lee et al. (2015), Nofsinger and Sias (1999), Ryu et al. (2015), Sim et al. (2016) and Yang et al. (2017c).

  5. Many studies support the view that professional institutional investors are better informed and more sophisticated and are armed with trading knowledge, skills, and experience (Ahn et al. 2008; Ryu 2015; Webb et al. 2016).

  6. The control variables are defined and selected based on Jensen and Meckling (1976), Myers (1977), Copeland and Galai (1983), Myers and Majluf (1984), Greenstein and Sami (1994), Aitken and Frino (1996) and Baker and Wurgler (2002). We compute turnover by dividing the number of shares traded daily by the total shares outstanding during fiscal year t and calculate annual turnover by aggregating the daily values over a year. We calculate volatility as the natural logarithm of the average of the 52-week standard deviations of daily returns during fiscal year t. Size is defined as the logarithm of total assets, and BM is the ratio of the book value to market value of common equity at the end of fiscal year t. ROA and Growth are denoted by the net income divided by total assets and the percentage change in sales during fiscal year t, respectively. We measure leverage by dividing the book value of debt by the sum of the market value of equity and the book value of debt at the end of fiscal year t. R&D is computed as the amount of research and development expenses divided by total assets during fiscal year t.

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Acknowledgements

The authors are grateful for the valuable comments and suggestions from Jiro Akahori (the editor-in-chief) and the anonymous referee. This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2016S1A5A2A02926024).

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  1. School of Business Administration, Chung-Ang University, Seoul, Republic of Korea

    Chune Young Chung & Yunjae Lee

  2. College of Economics, Sungkyunkwan University, Seoul, Republic of Korea

    Doojin Ryu

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  1. Chune Young Chung
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  2. Yunjae Lee
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  3. Doojin Ryu
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Correspondence to Doojin Ryu.

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Chung, C.Y., Lee, Y. & Ryu, D. Do Domestic Institutional Trades Exacerbate Information Asymmetry? Evidence from the Korean Stock Market. Asia-Pac Financ Markets 24, 309–322 (2017). https://doi.org/10.1007/s10690-017-9235-0

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