Tipping in Korea

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.