Tipping in Korea

66 Pages Posted: 20 Aug 2021

See all articles by William Bazley

William Bazley

University of Kansas

Emily Kim

University of Kansas - School of Business

Felix Meschke

University of Kansas - Finance Area

Kevin Pisciotta

University of Kansas - School of Business

Date Written: August 18, 2021

Abstract

Prior research documents that analyst revisions are important information events and that some investors trade ahead of them. However, prior studies have been unable to show which investors trade ahead of analyst revisions, the aggregate benefits to trading ahead, and the costs borne by various investors from trading against investors that anticipate revisions. To address these questions, we exploit high-frequency trading information from the Korea Exchange (KRX) that characterizes all purchase and sale transactions of twenty different investor groups. We first validate that analyst revisions contain valuable private information: upgrades increase prices by 2.5% and downgrades decrease prices by 2.9%. We next document that asset managers who are geographically and socially close to analysts anticipate recommendations up to two days before they are released, while other institutions do not. Lastly, we show that this ability to anticipate analyst revisions enables these investors to trade profitably against domestic retail investors and foreign professional investors. Local hedge funds earn $2.5 million more than normal when trading against foreign professionals ahead of analyst revisions, which is more than all other investor groups combined. Notably, local asset managers typically lose money when trading against foreign professionals, who seem to earn profits by engaging in high-frequency market making. In sum, asset managers in Korea appear to receive tips from brokerages about upcoming revisions, which shifts the competitive balance between domestic institutions and skilled foreign market makers, and aggregate profits around revisions depend on investor sophistication, geographic proximity, and cultural affinity.

Keywords: Geographic Proximity, Social Proximity, Sell-Side Analysts, Analyst Recommendations, Korean Stock Market, Wealth Transfers

JEL Classification: G12, G14, G15, G23

Suggested Citation

Bazley, William and Kim, Emily and Meschke, Felix and Pisciotta, Kevin, Tipping in Korea (August 18, 2021). Available at SSRN: https://ssrn.com/abstract=3907182 or http://dx.doi.org/10.2139/ssrn.3907182

William Bazley

University of Kansas ( email )

3143 Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States

Emily Kim

University of Kansas - School of Business ( email )

Capitol Federal Hall
1654 Naismith Dr.
Lawrence, KS 66045
United States

Felix Meschke

University of Kansas - Finance Area ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
(347) 433-5495 (Phone)

HOME PAGE: http://www.business.ku.edu/faculty/meschke-felix/

Kevin Pisciotta (Contact Author)

University of Kansas - School of Business ( email )

Capital Federal Hall
1654 Naismith Dr
Lawrence, KS 66045
United States

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