Matching Level And Investors’ Heterogeneous Beliefs

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Hyunuk Jung
Sanghyuk Moon


Earnings Quality, Matching Level, Trading Volume


This study investigated the relation between matching level and investors’ heterogeneous beliefs using listed firm (KOSPI) data in Korea. This study is based on prior research that reported that the higher the matching level, the less the noise included in accounting earnings and the higher the earnings quality. Karpoff (1986), Bamber (1987), Ajinkya, Atiase, & Gift (1991) and Dormeier (2011) explain that if there are different interpretations among investors regarding intrinsic value of a company, as a result, the trading volume can represent investors’ heterogeneous beliefs. 

Whereas the previous studies on matching level analyzed what kind of impact matching level improvement has on earnings quality, accumulated market adjusted return, foreign ownership, future earnings response coefficient (FERC) and bond credit rating. However, these studies have problems in measuring the matching level. So this study suggested additional proxy on matching level in addition to the proxy used in previous studies. Specifically, we analyzed the matching level model of Paek’s (2011b) by using the Prais-Winsten estimation method and then used the calculated explanatory power (Adj.R2) as a proxy for the additional matching level. 

To empirically analyze hypothesis of this study, we used firm-year observation from 4,094 firms listed on Korean Stock Exchange over the period from 2003 to 2011. We found that matching level regression coefficient consistently showed significantly negative values for each measurement. Moreover, we analyzed additionally by measuring the calculated regression coefficient (β2) of current expenses as matching level response coefficient after analyzing Dichev and Tang’s (2008) matching level measuring model by Prais-Winsten estimation method. It showed that regression coefficient of the current expenses and trading volume have negative correlation. This is consistent with this study, and it can be analyzed that as matching level improves, investors’ heterogeneous beliefs decrease. 

According to microeconomics theory of Mas-Colell, Whinston, and Green (1995), trading volume is explained to affect price changes. However, accounting and related studies analyze the information effect by using price change only. In this sense, this study is meaningful in that it conducted an analysis on the information effect of matching level through trading volume. In addition, this study contributes to understand the microscopic structure of the capital market.


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