Inventory Changes With Information Asymmetry And Informed Trading Patterns In The Korean Stock Market

Abstract

<p>In this paper, we examine how inventory changes are related to the trading patterns of foreign and institutional investors, especially in firms with information asymmetry. Prior researchers report that inventory changes could be associated with firm performance, earnings management, stock returns, and incentive contracts. In this study, we focus on the relationship between trading patterns of informed traders and changes in inventory, testing how inventory changes are associated with the investment decision-making of informed traders. After controlling for firm-specific factors, we find a significant relationship between changes in inventory and trading patterns of institutional and foreign investors. Under conditions of high information asymmetry, the negative relation between institutional trading and inventory changes is enhanced. However, the amounts invested by foreign traders are negatively associated with increases in inventory even in firms with low information asymmetry. We infer that foreign traders exhibit more conservative trading patterns than institutional investors.</p>