Previous literature posits that CEOs with inside debt holdings are more likely to engage in corporate social responsibility (CSR) since they respond to bondholders’ demands as their appetite for risk decreases. This study examines whether a CEO’s risk concerns moderate the effect of CEO inside debt holdings on the firm’s CSR performance. We find that the positive relationship between CEO inside debt and CSR is weakened when CEOs are close to retirement, or when firms face less product market competition within their respective industries. Our results also suggest that the effect of CEO inside debt, as well as the moderating effect of CEO retirement and low competition, differs between internal and external stakeholder CSR. Furthermore, we find that the moderating effect of CEO retirement is strongly supported in propensity score matching analysis and alternative model specification, whereas that of low competition is weakly supported. Overall, this study has important policy implications for board members, managers, investors, and regulators as it highlights that CEOs’ compensation structure and risk concerns can be determinants of corporate sustainability policies.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

In the current low-interest rates environment, Korean banks' profitability is expected to weaken significantly because of the large proportion of interest revenue in total revenue. For instance, Korean banks' interest revenue accounted for 84 percent of total revenues in 2019. As a results, Korean banks need to accelerate their strategy for revenue diversification, such as increasing non-interest revenue in total revenue. In general, revenue diversification, such as increasing a non-interest revenue, is expected to stabilize or improve banks' profitability. However, previous empirical studies show inconsistent results on the relationship between non-interest revenue and total profitability in banks. For instance, Smith et al. (2003) argue that banks' profitability is stabilized by diversifying revenue if the non-interest revenue increases. In contrast, De Young and Roland (2001), Stiroh and Rumble (2006) show that the high volatility of non-interest revenue offsets revenue diversification. Stiroh (2004) argues that the increase in non-interest income does not lead to risk diversification because of the the high correlation between interest revenue and non-interest revenue in analysis for U.S. banks. Thus, unlike previous studies, the paper analyzes the relationship between the proportion of non-interest revenue and profitability in Korean banks using the U-shaped test method of Lind and Mehlum (2010) to determine a nonlinear relationship between the proportion of non-interest revenue and profitability. Empirical results using the financial statements of 15 Korean banks from 2008 to 2019 show that Korean banks' profitability and the proportion of non-interest revenue have an inverted U-shaped relationship. Here, the maximum point of an inverted U-shape represents the optimal proportion level of non-interest revenue that generates the highest banks' profitability. It means that profitability improves as the proportion of non-interest revenue increases until the optimal proportion level of non-interest revenue. However, exceeded an optimal proportion level of non-interest revenue, the profitability decreases as the proportion of non-interest revenue increases. This inverted U-shape relationship is interpreted as follows. In a positive relationship between non-interest revenue and profitability, an increase in non-interest revenue obtains an additional profit channel and generates a revenue diversification effect. On the other hand, when non-interest revenue and profitability have a negative relationship, the increasing non-interest revenue causes a reduction in the opportunity profit of interest revenue and amplifies revenue uncertainty by the high volatility of non-interest revenue. The results indicate that Korean banks' excessive concentration of the management capabilities on non-interest operations may decrease the total profitability. In particular, the study also has found that Korean banks have a high correlation between commission revenue, which accounts for the largest proportion of non-interest revenue, and interest revenue. Thus, the result implies that Korean banks' increasing non-interest revenue strategy, although it increases non-interest revenue, has inefficient to achieve revenue diversification effects because of the high correlation between interest revenue and non-interest revenue. For instance, Korean banks often sell products based on non-interest to customers who buy products based on interest; this sales strategy weak the risk diversification effects by overlapping the customer groups between interest and non-interest products. This paper also conducts an empirical analysis by dividing banks into commercial and regional banks. The results show that commercial banks' profitability and the proportion of non-interest revenue have an inverted U-shape relationship. We also empirical test for commercial banks by classifying the observation based on the optimal proportion of non-interest revenue. The results show that the commercial bank's relationship between the proportion of non-interest revenue and profitability is significantly positive in the case of below the optimal proportion level. On the other hand, the commercial bank's relationship between non-interest revenue and profitability is insignificantly negative in the case of above the optimal proportion level, which is attributable to a small number of samples for banks with a proportion of non-interest revenue above the optimal proportion level. That is, the result implies the Korean banks' high reliance on interest revenue. Similarly, local banks have statistically only positive relationships between non-interest revenue and profitability due to the deficient proportion of non-interest revenue. In the current low-interest rate environment, it is inevitable for Korean banks to accelerate expanding non-interest revenue. However, as the results in this paper, excessive non-interest revenue expansion strategies may occur a negative impact on profitability according to an inverted U-shaped relationship between the proportion of non-interest revenue and profitability. Thus, Korean banks should first set up sophisticated and systematic strategies for expanding non-interest revenue to achieve an advantage of increasing non-interest revenue. To do so, banks need to differentiate their sale strategy by customer characteristics and develop their risk management capabilities to manage volatility in non-interest revenue. In addition, it is necessary to derive the optimal proportion of non-interest income for the individual bank by considering the characteristics of an individual bank in the future study.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

This study analyses the effect of corporate governance on corporate innovation. Specifically, I investigate firms that are given corporate governance scores from the Korea Corporate Governance Service (KCGS) in the Korean market from 2005 to 2016. These governance scores have four categories: shareholders’ rights, board of directors, market disclosure, and auditing body. For the purposes of this study, I primarily consider the total governance score, which is the comprehensive index of a firm’s governance status. In addition, the corporate innovation output is measured by R&D expenditures, the total number of granted patents, and the total number of citations received. R&D activity, in general, is a long-term investment that causes uncertainty and information asymmetry. It also generates an agency problem, which is a conflict of interest between shareholders and managers (Miozzo and Dewick, 2002; Finkelstein and Boyd, 1998; Coff, 2003). While shareholders prefer R&D investment to pursue the long-term growth and profit of their firm, managers are more likely to prefer short-term investments. As corporate governance aligns the interests of managers and shareholders, governance can positively affect to corporate innovation. Therefore, the hypothesis in this study is that a firm with good governance is likely to demonstrate high innovation (R&D, grated patent, forward citation). Previous studies mainly focus on the relationship between corporate governance and R&D investments, while demonstrating a positive relationship between governance score and R&D investment (Kim, 2003; Kim, 2015; Kim and Lee, 2012; Lee and Cho, 2001). However, there are a few studies that show the relationship between corporate governance and patents. Seok (2018) reports that firms with a high governance score hold more patents using KOSPI firms from 2011 to 2016. He, however, analyzes the total number of granted patents, which represents the quantity of innovative activities. Like Seok (2018), Choi, Chung, and Wang (2020) examine the effect of governance quality on firm innovation using the total number of granted patents. In this study, I analyze forward citations, which represent the quality of corporate innovation, in addition to granted patents. The crucial contribution of this study is the use of a novel innovation measurement. Unlike, in the US, Korean patent information has not been consolidated in a single database. Since researchers need to hand-collect patent data, previous studies have only analyzed data for short periods or specific industries. Moreover, most research on this topic in Korea uses the total number of granted patents each year to measure firm innovation. To overcome this limitation, I retrieve patent data using a Python program from KIPRISplus (Korea Intellectual Property Rights Information Service), which is a patent information service providing real-time access to KIPO’s database with Open API. This allows for the use of forward citation information in order to investigate the quality of the patent. Thus, I extend the prior literature by examining both the quality and quantity of innovative activities using various measurements. The main findings are as follows. I find a positive association between a firm’s governance score and the level of corporate innovation. Firms that have a higher governance score spend more on R&D, which is consistent with the previous literature. Additionally, firms with a strong governance score are likely to grant more patents than firms with weak governance. Moreover, I introduce forward citations as a measure of the quality of innovation, which is calculated by the total number of citations received in subsequent years. The result indicates a positive association between governance score and forward citations. Firms with a strong governance index tend to achieve highly-cited patents. There also exists a significant difference in the coefficient estimates between granted patents and forward citations. These results are robust when compared to alternative approaches. Governance and innovation activities are likely endogenously determined. To alleviate this endogeneity problem, I use the t-1 value for the governance score as well as the two-year sum from t+1 to t+2 for innovation variables, which allow me to find qualitatively similar results. Next, I employ 2SLS analysis with instrument variables. The listed firms, with over two trillion won of total assets, have an obligation regarding the appointment of an outside director, auditor, and audit committee. Thus, this method can be an appropriate instrument to eliminate endogeneity between governance and innovation (Ko, Baik, and Ahn, 2012; Kim and Eum, 2008; Sohn, 2010). In summary, all the results imply that corporate governance is an important factor for explaining corporate innovation activities, especially forward citations.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

In order to ensure stable retirement life for employees, their rights to receive retirement pension benefits must be guaranteed. The claim that guaranteeing the entitlement to pension benefit is important and that ways to protect entitlement are necessary have been continued, there has been little improvement in this regard since the introduction of the “Retirement Benefit Guarantee Act”. Although this act implements the “Minimum External Funding Ratio Regulation”, the “Wage Bonds Priority Repayment System”, and the “Wage Bonds Guarantee System”, it is insufficient to protect the entitlement to pension benefits. First of all, the “Minimum External Funding Ratio Regulation” has a limitation in that a significant number of companies do not meet the minimum funding ratio, however there is no compulsory punishment for this. Next, the “Wage Bonds Priority Repayment System” and the “Wage Bonds Guarantee System” serves to guarantee workers’ retirement benefit ex-post when employers fail to pay retirement benefit due to bankruptcy or financial difficulty. However, due to the limited coverage, it serves only as a function of guaranteeing the minimum cost of living for employees. In this study, we present a plan to guarantee retirement pension benefit of employees belonging to defined benefit entitlement according to the pension governance structure. In particular, we propose that the retirement benefits of employees under the current contract-based governance structure are guaranteed by the “Retirement Benefit Guarantee Fund,” which separates the retirement benefits from the current “Wage Bonds Guarantee Fund”. In addition, we propose to establish “Pension Benefit Guarantee Fund” operated by Pension Benefit Guarantee Institution to guarantee retirement benefits for members under the funded pension governance structure to be introduced in the near future. However, prior to the introduction of these benefit guarantee systems, it should be implemented on strengthening the regulation of the “Minimum External Funding Ratio Regulation” first. Meanwhile, in order to guarantee the payment of retirement benefit, workers' right to receive benefits must be protected at a reasonable level. In particular, it is necessary to legally establish eligibility criteria for payment guarantees and prohibit guarantees over a certain amount to prevent from moral hazard of employers and financial institutions. In addition, the “Retirement Benefit Guarantee Fund” and the Pension Benefit Guarantee Fund” should be operated under the government's agency along with compulsory subscription rather than voluntary subscription by the choice of the employer or trustee. This is because the government's initiative is needed to alleviate the problems of the payment guarantee mechanism that the aforementioned adverse selection and systematic risk cannot be controlled to some extent. Recently, there has been continuous argument that asset management behavior of retirement pensions should be improved as a way to increase the return on retirement pension assets. The most worrying part about the introduction of default options and fund-type retirement pensions under discussion for this purpose is the fact that the current retirement pension system does not have a practical mechanism to guarantee workers' entitlements. Therefore, in order to increase the subscription rate of the retirement pension and to eliminate blind spots, it is necessary to present a more practical plan to strengthen the right to receive retirement benefits prior to the mandatory introduction of the retirement pension. Although compulsory retirement pension system has the effect of expanding the introduction of retirement pensions in small and medium-sized businesses with relatively weak financial conditions, considering that survival is a priority for companies with poor financial conditions, it may be practically impossible to accumulate retirement benefits outside the company. Therefore, in order to guarantee workers' right to receive retirement pensions, in particular, guarantee and protection of the payment of retirement benefits is a pre-emptive task.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

Using short-window regressions, prior studies have shown that the conditional CAPM performs as poorly as the unconditional CAPM and that unconditional alphas are too large to be explained by the covariance between conditional betas and market risk premium. I examine the extent to which these results are driven by estimation biases in short-window regressions. Even when the true time-varying beta has highly transient components, beta estimates from these short-window regressions can be estimated to highly persistent because of yearly portfolio reformulations that are commonly employed in empirical studies. I show that, under these circumstances, large non-zero alpha estimates from short-window regressions are consistent with the conditional CAPM and the covariance estimates between conditional betas and market risk premium are biased downward and can have large estimation errors.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

In this paper, we develop a new way of measuring the herding behavior of market participants and test herding behavior among investors in Chinese IPO firms, compared with prior methods of herding measure developed by Christie and Huang (1995), Chang, Chen, and Khorana (2000), and Hwang and Salmon (2009). Our proposed new non-parametric herding measure, cross sectional time dispersion (CSTD), is defined differently as dispersion in IPO issuance timing, compared with traditional definitions of herding as dispersion in IPO returns or risk measure. Traditional CSSD, CSAD and beta herding measures do not provide statistically significant or consistent relationship between the herding measures and the IPO firms’ initial or long-term returns. In contrast, the new measure of time herding, CSTD clearly and consistently indicates that investors are affected more by the herding behaviors of IPO firms than by those of investors in the IPO markets in China.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

This study examines how ESG (Environmental, Social, Governance) factors are incorporated in credit ratings in Korea. The empirical results show that ESG scores have, in general, a positive effect on credit ratings, suggesting that corporate ESG is reflected to some extent in credit ratings. Among the factors of ESG, the governance factor has a significant relationship with credit ratings. The result is obvious in that some important governance elements such as internal control devices, disclosure and transparency, and ethical management are included in the aspect of business management risk during credit evaluation. On the other hand, social and environmental factors have a partial or insignificant relationship with credit rating. As social interest in ESG increases, it is highly likely that ESG itself becomes one of the most important determinants on credit ratings in the near future. In such a case, the results of this study can be used as a reference for the decision logic of credit rating reflecting ESG.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

Finance theory suggests that there should be a positive relationship between risk and the risk premium. Investors demand compensation for holding risky assets, and how much compensation they demand is related to both the degree of risk aversion and the amount of risk. Extensive empirical evidence in the past several decades also suggests that risk premium varies over time with strong association with business cycle, which implies that the relation between risk and the risk premium is also likely to vary over time. Motivated by these theory and empirical evidence, we examine time-varying risk-return relationship by estimating the relative risk aversion coefficient using consumption-based measures as state variables, aiming to capture the conditional relation between risk and the risk premium. A number of consumption-based measures have been proposed as forecasting variables for asset returns such as the surplus consumption ratio (Campbell and Cochrane, 1999; Wachter 2006), the labor income to consumption ratio (Santos and Veronesi, 2006), and the consumption-aggregate wealth ratio (Lettau and Ludvgison, 2001). Campbell and Cochrane (1999) introduce habit persistence to their asset pricing model and use the surplus consumption ratio as a proxy for time-varying relative risk aversion and Wachter (2006) uses a proxy for the surplus consumption ratio to extend the model to the bond market. The model of Santos and Veronesi (2003) implies that the ratio of labor income to consumption is inversely related to the conditional covariance between asset return and consumption. Therefore, the ratio is also inversely related to the risk premium. Lettau and Ludvigson (2001, 2005) introduce CAY, which measures deviation of consumption from its stable relationship with wealth. As consumers’ trading of financial assets is motivated by a desire to smooth consumption both over time and across states, CAY has the predictive power for the risk premium. Park, Eom, and Hahn (2019) constructs three consumption-based measures using Korean data and shows that these measures have predictive ability for the equity, bond, and housing risk premia in Korea. Their findings suggest that the consumption-based measures capture the information relevant for time-varying risk premium in Korea and can be used as state variables for empirical analysis. We estimate the relative risk aversion coefficient in the framework of Merton (1973)’s ICAPM by using three consumption-based measures as state-variables for the risk aversion. In constructing four proxies for the surplus consumption ratio, we use two estimation procedures based on Campbell and Cochrane (1999) and Wachter (2006) with two persistency parameter estimates. We follow Park, Eom, and Hahn (2019) to calculate the labor income to consumption ratio and CAY. We use both monthly and quarterly excess return data from April 1988 to March 2016. Two conditional variance models (GARCH(1,1)-M and EGARCH(1,1)-M) are estimated by the overlapping data inference (ODIN) method suggested by Hedegaard and Hodrick (2016). We also include five control variables which are the relative risk free rate, term premium, default premium, business cycle indicator, and industrial production. The main findings are as follows. First, when we use the proxy for the surplus consumption ratio as a state variable, we find a positive relationship between risk and the risk premium. The surplus consumption ratio has the statistically significant explanatory power of the relative risk aversion coefficient. Second, the main results are consistent across various cases of using monthly and quarterly excess return data, using GARCH(1,1)-M and EGARCH(1,1)-M models, and including control variables which are related to business cycle. Third, the explanatory power of the surplus consumption ratio is robust to using four alternative proxies used in this study. Finally, when we use the labor income to consumption ratio by Santos and Veronesi (2003) as a state variable, we also obtain some significantly positive time-varying risk-return relationship. However, we fail to obtain significant results when we use the consumption-aggregate wealth ratio by Lettau and Ludvigson (2001, 2005) as a state variable. Taken together, our empirical findings suggest that the relationship between risk and the risk premium should be investigated in a conditional setting, one of which is the model of Campbell and Cochrane (1999) with time-varying risk aversion.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

The importance of a firm’s innovation is emphasized because the innovation can promote not only a firm’s competitiveness but also viability(Park, Park, and Cho, 2006; Jeon and Lee, 2015). However, in Korea, little literature has been explored the relationship between firms’ innovation and cost of debt capital. Therefore, we investigate the effects of innovation on the cost of debt capital by using KOSPI-listed companies. In addition, we examine if there are any differences in the relationships between innovation and cost of debt capital when companies belong to the high-tech or non-high-tech industries. We also analyze how the interaction term between innovation and pay equality can affect the cost of debt. This paper proxies the level of a firm’s innovation by using the number of granted patents. For this, we collect patent data from KIPRIS(Korea Intellectual Property Rights Information Service) of the Korean Intellectual Property Office. As a proxy of firm’s innovation level, the patent data could be more suitable than research and development expenditure data because the granted patents can be recognized as the output of innovation activities(Choi, 2018). The main results can be summarized into three parts. First, in our regression, the number of granted patents as a proxy of innovation has a negative effect on the debt cost which shows that more innovative company has a lower cost of debt. It also implies that a firm’s innovation activities could be recognized positively by creditors. These findings are also robust when we use a two-stage least squares regression model, pooled OLS regression model, and random effects model. Our results are consistent with Hsu, Lee, Liu, and Zhang(2015) which investigates the effect of innovation on the cost of capital using the United States data. Second, in high-tech industry, the acquiring patent rights is one of the key factors for surviving. Thus, we split the sample into high and non-high-tech industry groups. The results show that the coefficient of innovation is significant in the high-tech industry, but not in the non-high-tech industry. These findings imply that bond investors may think that the innovation is more important for high-tech firms than non-high-tech firms. Third, in high-tech industry, the coefficient of pay equality is positive and the coefficient of interaction term between innovation and pay equality is significantly negative. The pay equality variable takes the value of one if manager-employee pay gap ratio is equal or less than the median, and zero otherwise. In summary, this study finds that the firm’s innovation has a positive effect on the cost of debt capital and this relation is significant when the firms belong to high-tech industry, not in non-high tech industry. We also find that, in high-tech industry, the pay equality of manager-employee may increase the cost of debt capital but a firm’s innovation activities can reduce the negative effects of pay equality. These findings provide useful information and make contributions not only for high-tech firms’ managers but also for innovation policy makers.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

During the economic downturn, the demand for safe haven properties increases, which is known as the flight-to-quality phenomenon. Thereafter, the global financial crisis increase demand for safe assets. Interest in safe haven property and flight-to-quality phenomenon has increased not only in practice but also in academic circles. Baur & Luecy(2010) defined a safe haven property as an asset that has a negative correlation or little correlation with other risky assets when the market is unstable. This study analyzed whether the gold market can function as a safe haven property to the Korean stock market, focusing on KRX gold market data. Gold traditionally has the nature of a safe asset because of its physical scarcity and the historical facts that itself served as currency. Studies investigating the gold market and stock market after the financial crisis confirm that the gold market serves as a sure safe haven for advanced countries especially with key currencies. Baur and Lucy (2010) showed that gold serves as a safe haven for the stock markets of the United States and major European countries, and studies such as Ciner et al. (2013), Baur and McDermott (2010), and Liu (2010) also show that gold serves as a safe haven in developed countries. However, several studies investigate whether gold plays a role as a safe asset in emerging markets, while no consistent consensus has yet been achieved. Emerging markets are well known to have different characteristics from advanced countries during the financial crisis while emerging central banks and others increase the weight of gold to hedge the depreciation of the U.S. dollar during the financial crisis, and demand for gold will be different from advanced countries. For this reason, the results of gold serving as a safe haven for the stock market in emerging markets vary depending on the sample period. Many studies on the gold market in emerging markets, including Korea, does not directly use the domestic gold market, so there is a time difference when using daily data. As a result, they do not reflect properly the price information of gold. For this reason, it is necessary to study using domestic gold market data. The KRX gold market which is corresponding to the Koran stock markets in opening time and has relatively low investment costs. We analyze the correlation between KOSPI and the safe haven assets and compare the performance of the portfolios including KOSPI and the safe haven assets. We also include analyzing the dollar and bonds, which is a traditional risk-free asset. We employ daily returns of gold prices in the KRX Gold Market from March 24, 2014, which is the opening day of the KRX Gold Market, to April 29, 2020. We also use daily returns of the bond ETF, which underlying asset is the 3-year Korean Treasury-Bond, and use daily returns of KRW-USD exchange rate during the same sample period to the KRX Gold Market. As a result of empirical analysis gold and USD shows a significant negative correlation with the Korean stock market, respectively, which implies both gold and USD paly role of a safe asset against the Korean stock market. In particular, the KRX gold market shows high returns during the periods when stock markets fell down. Furthermore, we analyzed the effects of the properties of safe assets such as gold and the US dollar on portfolio performance, through the historical standard deviation and the Sharpe ratio index of the minimum variance portfolio and the equal-weighted portfolio. In terms of portfolio performance, gold plays a similar role as a traditional safe asset such as Treasury bonds improving performance by recouping the decline in stock returns within the stock price down turns. Gold price increases could further enhance portfolio performance than Treasury bonds. Whereas the KRX gold market, unlike treasury bonds, is not stable in correlation with KOSPI. When constructing the equal-weighted portfolio, performance is better on the basis of excess returns and Sharpe ratio indices rather than constructing minimum variance portfolios that change the proportion of gold. Furthermore, we analyze the dynamics among gold, stock, and USD employing an analysis of the vector autoregression (VAR) model, and find that there is a significant negative (-) response between gold and the Korean stock market. However, there was no significant negative reaction between the U.S. dollar and the Korean stock market. In conclusion, the empirical analysis of the stock market, including gold, shows that the gold market serves as a safe haven for Korean stock investors and that it can increase performance when incorporated in the investing portfolio. Characteristics of gold as a safe asset is also expected to provide new insights to stock investors. In general, safe assets are only known to hedge risk, but it would be helpful research in practice and academia to improve returns if they were operated with risky assets.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel