عدم تقارن اطلاعاتی و رفتار تجاری سرمایه گذار در برابر اطلاعیه تغییر نرخ اوراق قرضه Information asymmetry and investor trading behavior around bond rating change announcements

In the field of financial economics, the issue of information asymmetry among investors has long been studied and documented, and evidence suggests that certain types of investors achieve superior investment performances and make better stock return predictions than others. Interestingly, however, empirical studies have provided mixed results. One group of studies finds that domestic investors outperform their foreign counterparts due to their greater access to information about local companies, that is, their familiarity and proximity (Bae, Stulz, and Tan, 2008; Chan, Menkveld, and Yang, 2007; Choe, Kho, and Stulz, 2005; Dvořák, 2005; Hau, 2001; Lee, Ryu, and Kutan, 2016). Another group of studies finds that foreign investors have an informational advantage over domestic traders due to their experienced trading skills and sophisticated trading strategies (Bae, Yamada, and Ito, 2006; Chung, Kim, and Ryu, 2017; Froot and Ramadorai, 2008; Grinblatt and Keloharju, 2000; Huang and Shiu, 2009; Kamesaka, Nofsinger, and Kawakita, 2003; Richards, 2005; Yang, Ryu, and Ryu, 2017). In the global stock markets, a majority of studies document an informational advantage of institutional investors over individual investors, and these findings are consistent with the perception that institutions are relatively more experienced and skillful than individuals, who tend to make irrational investment decisions (Barber, Lee, Liu, and Odean, 2009; Brandt, Brav, Graham, and Kumar, 2009; Chuang and Susmel, 2011; Dorn, Huberman, and Sengmueller, 2008; Ng and Wu, 2007; Nofsinger and Sias, 1999). This study examines stock market reactions to corporate bond (credit) rating change announcements, including changes in stock prices and investor behavior in terms of trading volumes and trading patterns, in the Korean market, which has been shown to exhibit significant information asymmetry across different investor groups. This study particularly delves into the questions of whether information asymmetry across different investor groups exists around bond rating change announcements, and, if so, whether this informational advantage is utilized to achieve abnormal stock returns. The motivation of this study is threefold. First, a number of studies examine the effect of bond rating changes on stock market behavior (i.e., stock returns and trading volumes), but differences in investor behavior due to information asymmetry have been much less frequently explored. The Korean financial market has a distinct framework in that domestic individual investors, who are generally considered uninformed traders making noisy and speculative trades, are major market participants, whereas developed financial markets, such as the New York Stock Exchange, are mainly led by institutional investors. Figure 1 shows the trading activities of domestic individuals, domestic institutions, and foreigners in the Korea Composite Stock Price Index (KOSPI) equity market. According to the Korea Exchange (KRX), during the overall sample period (2000-2015), trades by domestic individuals account for 88.17% of total trades, whereas those by domestic institutions and foreigners account for 5.58% and 6.00% of total trades, respectively. 1 This predominance of individual investors in the Korean market provides an ideal setting to discern information asymmetry among investor groups.  Second, although KRX has the fourth largest bond market in the world in terms of trading volume,2 little attention has been paid to the behavior of emerging stock markets, including that of KRX, around rating change announcements. Furthermore, Korean credit rating agencies have consistently endeavored to enhance their rating quality through strategic alliances with the major international agencies, like Moody’s and Fitch. Considering the size of the Korean stock and bond markets and the world-class standard rating quality of the rating agencies, it is worth examining the informational effect of bond rating changes on the Korean market, which is a leading and representative emerging market. Another motivation is that a majority of event studies testing informational superiority focus on earnings announcements as scheduled announcements (Ali, Klasa, and Li, 2008; Barber and Odean, 2008; Battalio and Mendenhall, 2005; Bernard and Thomas, 1990; Bhattacharya, 2001; Campbell, Ramadorai, and Schwartz, 2009; Kaniel, Liu, Saar, and Titman, 2012; Kaniel, Saar, and Titman, 2008; Utama and Cready, 1997; Walther, 1997), whereas unscheduled announcements have received relatively little attention. As unscheduled announcements have no fixed timing or direction, it enables a clearer analysis of information asymmetry among investors through the differences in trading volume and patterns between informed and uninformed traders before and after unscheduled announcements. Therefore, we focus on bond rating change announcements as unscheduled announcements. Credit risk refers to the likelihood that an issuer will fail to meet its financial obligations on its financial instruments (e.g., commercial papers and corporate bonds). The level of credit risk is usually indicated by “credit ratings,” which are assigned and published by external companies called credit rating agencies. Credit ratings not only serve as an indicator of the issuer’s capacity to make interest and principal payments on its bonds in accordance with the agreed terms, but they also convey information on an issuer’s future cash flows, as the ability to repay the principal at maturity reflects the issuer’s capacity to generate certain cash flows on a specific date in the future. Therefore, credit ratings provide a critical source of information about firms that stakeholders, including investors, can use to reduce the level of information asymmetry that they may otherwise potentially face. Hence, it is worth studying whether and to what extent bond (credit) ratings can be used by investors as reliable and informative instruments for investment decisions. Using the high-quality equity transaction data of Korean listed firms that experienced bond rating changes, we investigate how informative rating changes are by analyzing stock price responses. In addition, we examine the investor trading behavior in response to rating changes (i.e., changes in trading volumes and order imbalances), particularly focusing on the reactions of different investor groups classified as domestic individual, domestic institutional, and foreign investors. Our contributions are as follows. First, we document not only the stock price responses to the information driven by the bond rating changes but also the differing trading patterns of investors by examining the abnormal trading volumes and net order imbalances of different investor groups. Second, the availability of high-quality trade data classified by investor type enables us to analyze the differing trading patterns of each investor group and to gain more insight into information asymmetry. Thus, we further examine whether any particular group of investors has realized capital gains through the information edge and carry out more sophisticated analyses differentiating the trading behavior of each investor group (i.e., domestic individuals, domestic institutions, or foreign investors) by examining each group’s net order imbalance for individual stocks, which has not been covered in depth by existing studies owing to the limitation in their dataset. We find the followings by the empirical analyses on the high-quality dataset. First, though abnormal stock returns are observed around both upgrade and downgrade (bond rating) announcements, stock price reactions to downgrade announcements are statistically more significant than those to upgrade announcements. This indicates that the stock market reacts more sensitively to rating downgrades than to upgrades. Second, the trading volume generally reacts more strongly to downgrades than to upgrades. Through the analyses on the aggregate dataset, we find that downgrades are significantly associated with the abnormal trading volume behavior, whereas there is little evidence of a volume effect associated with upgrades. Investor type analyses indicate that upgrade announcements elicit significant increases in abnormal volumes for domestic institutions and foreign investors, whereas significant increases are observed for domestic individuals only when downgrade announcements take place. These suggest that trading responses towards identical event types (upgrades or downgrades) vary across investor groups, indicating the presence of information asymmetry among investors. Third, an excess of sell orders is observed for domestic individuals around upgrades, whereas the opposite order imbalance is found for foreign investors, implying that foreign investors buy the stocks with upgrade announcements and anticipate capital gains over a longer time horizon. These support the relative information edge of foreign investors compared to domestic individual investors. On the other hand, domestic institutions react to downgrades by placing more sell orders, whereas individuals place more buy orders; this result indicates that individual investors are likely to face impending capital losses and, thus, are disadvantaged by the downgrade announcements. Thus, domestic and foreign institutional investors have an informational advantage over the individual investors in the Korean market. The rest of the paper is organized as follows. Section 2 presents a literature review. Section 3 explains the bond rating process in the Korean market, and Section 4 describes the sample data and methodology. Section 5 provides the main empirical results and discussions, and Section 6 concludes.