Accruals quality, information risk, and institutional investors’ trading behavior: Evidence from the Korean stock market

Abstract

This study analyzes the effect of firm-specific information risk, measured by accruals quality, on the cost of capital using institutional investors’ trading behavior. Institutional investors in firms with lower accruals quality increase their net selling in later years. Furthermore, these investors’ net selling is relevant to the innate and discretionary factors of accruals quality. This relationship is stronger for foreign institutions than for domestic institutions, and it is mostly observed under favorable macroeconomic conditions. We do not observe this relationship for large business groups connected by shares.