Are Individual Investors Uninformed? Evidence from Trading Behaviors by Heterogeneous Investors around Unfaithful Corporate Disclosure

This paper examines the trading behaviors of individual investors as well as domestic and foreign institutional investors around a unique corporate event: unfaithful disclosure (non-disclosure, canceling disclosure and changing disclosure of a firm's material information). Our study relied on the daily trading data of different groups of investors in Korea's stock market. We found that the market reacts negatively toward announcements on forewarnings of unfaithful disclosure by the Korea Exchange as well as toward the confirmation of the forewarnings. Further, our finding indicates that firms that are proved to be responsible for the unfaithful disclosure tend to perform poorly prior to the announcement days of the forewarnings. This implies that poor-performing firms are likely to have negative information and thus, have incentives not to disclose or not to correctly disclose bad news. In addition, our result demonstrates that firms performing poorly before receiving the forewarnings subsequently perform poorly after confirmation of the unfaithful disclosure, which is consistent with the incentives of unfaithful disclosure. Most importantly, we found that individual investors constantly buy shares of firms receiving the forewarnings prior to the announcements, whereas both domestic and foreign institutional investors sell them. Even after the confirmation of unfaithful disclosure, individual investors continue to buy shares of unfaithful firms and domestic and foreign institutional investors continue to sell them. Because institutional investors are considered to be better informed and/or more sophisticated investors than individual investors, this finding adds to the evidence of information asymmetry among different types of investors prior to the news release as well as to the evidence of trading behaviors by individual investors who are unsophisticatedly following the news release.