Analyst Tipping on Neglected Firms: Evidence from the Korean Stock Market

Using data from the Korean stock market (1,907 firm-years for the 20052010 period), we extend the study of analyst tipping first documented by Irvine etal (Review of Financial Studies, 20, 2007 pp. 741768), who show evidence that brokerage firms tip institutional investors in order to maximize the brokerage firms' profits. First, we find that individual investors respond to reports on neglected firms while institutional investors do not. We then document that tipping inferred from abnormal trading responses is concentrated on neglected firms characterized by low analyst coverage. Furthermore, we find that it is primarily institutional investors who are on the receiving end of the tipping as measured by pre-release abnormal returns and pre-release net purchase position. Finally, brokerage firms appear to tip domestic institutional investors when reports are positive while they tip foreign institutional investors when reports are negative. Specifically, domestic institutional investors increase their net pre-release purchase volume when reports are positive while foreign institutional investors reduce their net pre-release purchase volume when reports are negative. These findings are consistent with brokerage firms tipping clients who can contribute the most to the firms' trading commission revenues. We make a contribution to the literature by finding evidence that analyst tipping is primarily a wealth transfer from individual investors to domestic institutional investors.