The momentum effect is the phenomenon whereby the higher the past return on an asset, the more persistent this return will be in the future. The momentum effect can be found not only in equity, but also in several other asset classes. For example, recent studies show that momentum occurs in the corporate bond market (Pospisil and Zhang, 2010; Jostova et al., 2013; Israel et al. 2017; Houweling and Zundert, 2017, Ho and Wang, 2018). This phenomenon has been documented in the U.S. and various other regions, where various strategies for promoting momentum are appearing. However, empirical studies on the momentum effect in Korea are mostly limited to stocks. AAlthough bonds represent a large proportion of Korea’s financial market, studies of the existence of momentum in this market are still rare. Therefore, we attempt to determine whether the momentum effect exists in the Korean corporate bond market, and if so, what drives this effect. We focus on the corporate bond market, not the government (treasury) bond market, for the following reasons. Depending on the characteristics of the firm that issues a corporate bond, the speed at which investors respond to this information may vary. Given the characteristics of corporate bond issuers, the momentum effect is more likely to occur if there are differences in the speed at which information is reflected. In contrast, in the government bond market, issuers are not diverse. Therefore, the information asymmetry among market participants is smaller for government than corporate bonds, so investors have less influence in the government bond market. Participants in the corporate bond market are more likely to interpret private or public information differently from each other than their counterparts in the government bond market are. Our main results are as follows. First, the higher the past return of a bond, the higher its future return. In other words, we verify the momentum effect. A momentum strategy comprising a six month formation period and a six month holding period shows an average return of 0.17% per month (2.02% per year). The momentum in the corporate bond market is not explained by previously observed systematic risk factors for bonds and stocks (Fama and French, 1993, Carhart 1997). Thus, we cannot conclude that the observed momentum of corporate bonds is associated with compensation for systematic risk. The profitability of the abovementioned corporate bond momentum strategy remains robust even when we control for various characteristics, such as the duration and age of the bond. Second, the profitability of the bond momentum strategy is strong when the formation period and holding period are the short-term periods of three to six months each. The corporate bond momentum is mostly sustained in the short term. Third, the bond momentum strategy is profitable during the period excluding financial crisis and economic expansion, but not during the period including financial crisis and contraction. Fourth, the corporate bond momentum is strong in the low credit rating group. In other words, the higher the past return, the higher the future return in the group of firms with low credit ratings. Fifth, we find that most of the firms in the low credit rating group, which shows a significant momentum effect, are small and have low liquidity. Accordingly, we suggest that the momentum effect occurs at the lower credit level due to the gradual information diffusion phenomenon reported by Hong and Stein (1999). For example, momentum is high under small market capitalization, when private information is difficult to spread. In addition, it is difficult to interpret information from firms with low credit ratings. Sixth, we do not find evidence of the spillover between stock momentum and bond momentum reported in previous studies (Gerbhart, Hvidkjaer, and Swaminathan, 2005). For example, we do not observe a significant relationship between high stock returns in the past and high future bond returns. Finally, after controlling for the effect of bond rating changes on bond returns, the performance of the momentum strategy remains statistically and economically significant. Our study has the following academic and practical implications. First, it reveals a momentum phenomenon in non-stock assets, namely corporate bonds, in the Korean market. Many studies focus on the momentum phenomenon in stock markets. Our results suggest that we also need to research the momentum phenomenon that can occur in various asset classes in Korea. Second, portfolio managers can use our findings to develop an effective bond investment strategy. In the overall asset management industry in Korea, investments in corporate bonds are increasing, especially among institutional investors such as pension funds and insurance companies. Therefore, based on the results of this study, the abovementioned momentum strategy can be used to obtain excess returns in the Korean bond market.

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Credit rating agencies give firms credit ratings to indicate their creditworthiness. As these agencies have sophisticated methodologies for evaluating managerial, affiliate, industry, business, and financial risks, they play an important role in the financial market. In addition, credit rating agencies play the monitoring role of managers and mitigate information asymmetry problems (Fulghieri et al., 2014; Surendranath et al., 2016) in the debt market by producing and delivering information. Many studies argue that credit ratings are related to firms’ financial constraints and/or ability to access the debt market (Faulkender and Petersen, 2006; Campello et al., 2010; Karampatsas et al., 2014). There is evidence that credit ratings affect the investment activities of domestic firms (Kim and Shin, 2017). For example, credit ratings may affect corporate mergers and acquisitions (M&A), which are complex processes reflecting relatively large corporate investment decisions. However, there is little research on the influence of credit ratings on M&A activities in Korea, despite studies of this topic in other countries (Harford and Uysal, 2014; Karampatsas et al., 2014, Aktas et al., 2018). If credit rating agencies deliver information through credit ratings (Fulgieri et al., 2014, Surrendranath et al., 2016), companies that have received credit ratings (i.e., rated firms) will have fewer information asymmetry problems than those that have not. Boeh (2011) states that mitigating information asymmetry reduces the transaction and contract costs associated with M&A. As information asymmetry in the domestic stock market is a risk factor that increases the required return (Choe and Yang, 2007), credit ratings affect M&A activities. Therefore, rated firms are more likely to participate in M&A than non-rated firms are. A firm’s credit rating level represents its financial constraints (Faulkender and Petersen, 2006; Campello et al., 2010; Karampatsas et al., 2014). As M&A increase the risk of bank-ruptcy (Bessembinder et al., 2009; Furfine and Rosen, 2011), companies with low credit ratings are highly likely to avoid acquiring other firms. Therefore, firms with high credit ratings are more likely to be bidders in M&A transactions than are firms with low credit ratings. However, M&A transactions can also efficiently relocate the assets of bankrupt firms (Hotchkiss and Mooradian, 1998). As financially distressed firms have a motive to sell their assets (Weitzel and Jonsson, 1989), they are more likely to sell their assets than non-distressed firms are. Therefore, this study argues that firms with low credit ratings are more likely to be M&A targets s than firms with high credit ratings are. This study yields three main findings. First, rated firms are more likely to participate in M&A than non-rated firms are, whether as bidders or as targets. This finding is more pronounced when firms face information asymmetry problems. We measure information asymmetry by the number of analysts and the competitiveness of the product market. When the number of analysts is zero (vs. one or more) or the market is non-competitive (vs. competitive), rated firms are more likely to be bidders (or targets). Therefore, a firm’s credit rating affects its M&A activities through the benefit of information. In addition, the benefit of reduced information asymmetry available to rated firms affects the market reaction when acquirers announce their M&A projects. Second, we find that a firm’s rating level affects its probability of being a target of M&A. Firms with very low credit ratings face particularly high levels of default risk and financial distress. When a firm is financially constrained or experiencing bad sales, or when a global financial crisis is underway, the negative effect of credit rating level on the firmatiprobability of being a target is more pronounced. Under the same circumstances, the effect of credit rating level on a firm’s probability of being a bidder is also negative. These findings reject our hypothesis that a firm that is better able to conduct capital financing is more likely to be an acquirer. Third, we find that credit rating level and biddersrating level and r. is moreore pronouninverted U-shaped relationship. Our results suggest that firms with very low credit ratings are undervalued by investors in in terms of M&A projectswith very low credit ratings they have a high required or expected rate of return. In addition, managers of firms with very high credit ratings are likely to have high discretion in their investment decisions, because their firms have high credit quality. Such managers are also likely to pursue private benefits; an observation related to the free cash flow hypothesis. This study contributes to the empirical literature on credit ratings and firms’ investment decisions. Research on the relationship between credit ratings and M&A activities is particularly scarce. We present new evidence that firms gain an information benefit through credit ratings. We also show that the principal– agent problem is particularly pronounced when firms have very high ratings.

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This paper analyzes the impact of a downgrade in corporate credit rating on the financial policies of competitors in the same industry. Most previous research on credit ratings provides a model for estimating credit ratings based on firms’ financial characteristics; the pattern of stock or bond returns after credit rating changes; the competitiveness of the credit rating market; or the reliability of ratings before or after the global financial crisis. Credit rating adjustment, however, is under-researched. This important event provides investors and other stakeholders with information on firm valuation and has a direct impact on financing costs, thus profoundly affecting firm growth and financial stability. We investigate the following two conflicting hypotheses. First, downgrading the credit rating of a particular firm may act as an industry-wide negative signal to the market. This will affect the investment returns of competing firms, which may lead competing firms within the industry to be more conservative in their financial policies, due to concern about the risk of a corresponding downgrade in their credit ratings. The second hypothesis is that downgrading the credit rating of a particular firm may increase the financial costs of the firm and thereby reduce the intensity of competition in the industry. This may lower the growth potential of the firm, which competitors can use as an opportunity to increase their investment by implementing a more aggressive financial policy. We call the effect described in the former hypothesis the “contagion effect,” and that described in the latter the “competition effect.” To test these conflicting hypotheses, we obtain all of the bond rating data of firms listed on the Korea Composite Stock Price Index from 2005 to 2018 and examine the changes in their corporate financial policy in three dimensions: cash holdings, capital expenditure, and long-term leverage. Studies document that cashing holdings are affected by market risk as well as the risk associated with firms’ business activities. A change in credit ratings can also affect the method of raising funds. Increasing leverage leads to a decline in liquidity due to high interest payments. In addition, an increase in financing costs due to an increase in firm default risk tends to limit external financing for future investments. In addition, the impact of credit rating adjustments within an industry may vary depending on the competitive position of a firm experiencing a credit rating downgrade, the competitive position of competing firms, and the degree of competition in the industry. Firms in a less competitive industry can more aggressively use opportunities to implement financial policies, while firms in a more competitive industry may have to make more aggressive investments to survive. Our empirical results show that a credit rating downgrade tends to lead firms in the same industry to maintain a conservative financial policy by increasing their cash holdings and decreasing their capital expenditure and long leverage. However, this phenomenon varies across competitive positions within an industry. Firms taking a strong competitive position in the top 25th percentile of revenue are more likely to maintain a conservative financial policy when a rating downgrade occurs in their industry. This relationship is more significant when firms whose ratings have been downgraded are in the same competitive position, i.e., in the top 25th percentile of revenue. The results are consistent with the contagion effect hypothesis. In contrast, firms taking a weak competitive position, i.e., in the bottom 25th percentile of revenue, tend to maintain an aggressive financial policy. This relationship is also more significant, both statistically and economically, if firms whose credit ratings have been downgraded are in the weakly competitive group, i.e., the bottom 25th percentile of revenue. This finding is consistent with the competition effect hypothesis. We also find that the results above, linking the contagion effect with highly competitive firms and the competitive effect with weakly competitive firms, are more significant when the industry is more competitive, as measured by the Herfindahl-Hirschman Index. Most existing studies of credit ratings analyze credit rating prediction models, the stock and bond yield behaviors of firms with rating changes, or the reliability of credit ratings and related systems. This paper contributes to the credit rating literature by examining the effects of credit rating changes on the financial policies of competing firms. It also makes an important contribution to the literature on corporate finance, specifically corporate capital structure theory, by providing evidence that changes to firms’ credit ratings are a key determinant of the financial and investment policies of competing firms in the industry. In addition, the finding that risk-seeking behavior varies with the competitive position of a firm may have important policy implications for relevant financial authorities seeking to enhance firms’ financial soundness.

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This study explores the cause of the adverse relationship between ESG performance and corporate value through mispricing and idiosyncratic volatility. It calculates the rate of return for each ESG grade and the rate of return based on the degree of mispricing and idiosyncratic volatility. It also measures the returns of the group portfolios, which consist of a combination of the ESG grade and the degree of mispricing or the degree of idiosyncratic volatility. In addition, it calculates the net buying ratio by investor types on the ESG rating, and measures the investment performance by investor types by comparing the net buying ratio and returns of the group portfolios composed of ESG and mispricing or idiosyncratic volatility. This study finds that the ESG grade inversely relates with the rate of return. However, A+ grades display exceptionaly high returns. While idiosyncratic volatility presents a negative relationship with the rate of return, mispricing presents a positive relationship with the rate of return; thus, it is found that there is no arbitrage opportunity for financial transactions due to mispricing. On return analysis of the group portfolios composed of both ESG ratings and mispricing, the overvalued stock shows a higher return, so that mispricing is not corrected on a quarterly basis. Particularly, in the case of grade A or higher, the underestimated group displays a very large negative return. The return analysis of the group portfolios consisting of a combination of ESG rating and a degree of idiosyncratic volatility shows that the group with low idiosyncratic volatility presents higher returns than the group with high volatility. On the other hand, in the case of grades A and above, the group with low idiosyncratic volatility shows negative returns. A similar lower level of return for grade A or higher with undervalued and low idiosyncratic volatility portfolios is also found in groups composed of three-dimensional combinations of mispricing, performance persistence, and ESG ratings. Therefore, this is taken to be the cause of the return abnormality of the ESG excellence grade. On the other hand, corporate governance as sub-sector of ESG presents somewhat different results from environment or social responsibility. It shows higher returns in the group of grade A or higher corporate governance with underestimated and low idiosyncratic volatility. In addition, even in groups composed of three dimensions such as mispricing, idiosyncratic volatility, and governance ratings, the group (LL) with undervalued and low idiosyncratic volatility displays the second highest return. Accordingly, it is inferred that the market gives some degree of confidence in the level of governance. Upon analysis of the net purchase ratio for the ESG ratings by investor types, it is found that pension funds carry out the most faithful trading strategy on the ratings. The pension funds record net purchases for all grades of sub-sectors and demonstrate that the higher the grade on sub-sectors, the higher the net purchase ratio. In contrast, institutional investors present net sales in all cases except in the group of A or higher governance structure. On analyses of the groups consisting of ESG grades and mispricing or idiosyncratic volatility by investor types, institutional investors, pension funds, and individual investors present a higher net purchasing ratio on groups with overestimated and higher idiosyncratic volatility while foreign investors accomplish a higher net purchasing ratio on groups with lower idiosyncratic volatility. Consequently, the foreign investors present the best performance through smart trading strategy that they show net purchase to overestimated stocks, net sales of underestimated stock, and higher net purchase of low idiosyncratic volatility stocks whereas individual investors exhibit the lowest performance.

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This paper analyzes reverse factoring in e-commerce, which is currently receiving increasing attention. As Internet technology advances during the Fourth Industrial Revolution, the e-commerce market is also growing. However, e-commerce retailers cannot keep up with the growth of the market, due to capital constraints. Supply chain finance can offer a solution to the capital constraints of e-commerce retailers. In particular, reverse factoring, a kind of supply chain finance, is a service that exchanges accounts receivable for discounted cash. It can ease the capital constraints of e-commerce retailers. Recently, peer-to-peer (P2P) lending platforms have begun to offer reverse factoring services to fill gaps in the provision of traditional financial institutions, such as banks. Supplying these reverse factoring services at a relatively low discount rate is conducive to the growth of e-commerce retailers. Therefore, we compare the discount rate of reverse factoring services according to whether the bank or the P2P platform provides the service. The existing literature on supply chain finance focuses on exploring whether retailers use supply chain finance. However, this paper compares the types of service provider used. Therefore, the models used in previous discussions are not directly applicable to the analysis in this paper. We extend the newsvendor model by reflecting the characteristics of P2P lending in our supply chain financial service analysis. We construct a demand function for retailers utilizing the newsvendor model. We also construct a supply function for each financer. We focus on the reverse auction system to explain the characteristics of P2P lending. A reverse auction is the opposite of a general auction. In the former, which many sellers compete in offering a price to a single consumer buying a product. In P2P lending, the P2P platform presents the target amount and rate of return for each loan. In this process, the platform sets the rate of return to the level at which the target amount can be raised, considering the competition among the investors. Therefore, P2P lending takes the form of a reverse auction. We consider the reverse auction form when constructing the supply of the P2P platform. This paper diverges from previous research in analyzing the demand for and supply of reverse factoring to calculate an equilibrium. The analysis reveals that the financer that can provide retailers with a low discount rate depends on market conditions: the situation in the sales market, the retailer’s preference for liquidity, and the retailer’s estimation of the credit risk of the e-commerce platform. The reverse factoring supply is divided into supply by the bank and supply by the P2P platform. Factors affecting the supply by the bank are the rate of return that the bank can obtain from an alternative investment option and the estimated credit risk of the e-commerce platform. Lastly, the risk aversion of P2P investors and the estimated credit risk of the e-commerce platform affect the supply by the P2P platform. We present policy implications based on these analyses. Given that P2P financing is a type of alternative financing, it is expected to offer a reverse factoring service to e-commerce retailers at a low discount rate. However, contrary to expectations, banks are currently offering services at a lower discount rate than P2P platforms are. This seems to be due to the inherent information asymmetry in the P2P lending market, which leads P2P investors to overestimate the credit risk of e-commerce platforms. This plays a key role in reducing the supply of reverse factoring through P2P platforms. If the bank’s discount rate is rigid, the discount rate of the P2P platform must be reduced to reduce the burden on small e-commerce retailers. Therefore, policy discussions on ways of boosting P2P lending should be carried out. It is also essential to mitigate information asymmetry in the P2P lending market.

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We investigate how geographic locations of international mutual funds affect fund performance and investment behavior for both emerging and developed markets. Using one- and three-factor alphas, we find that local funds outperform remote ones especially in emerging markets. However, under the four-factor alpha, they tend to underperform. A plausible explanation is that the excess returns for local fund man-agers are attributable to momentum and thus disappear when this is controlled. Regarding trading behavior, we compare herding among same or local-region versus different or remote-region fund managers. We find that fund trades correlate more with trades of other funds in the same (local) regions than with those in different (remote) regions. This phenomenon is more profound in the case of emerging markets. This finding is consistent with the networking (word-of-mouth) effect among investors. We also find that local funds exhibit more market timing behavior but are less active in stock picking. The result suggests that local managers are more affected by market sentiment and therefore their trading is more affected by market move-ments whereas remote fund managers focus more on stock fundamentals. This is the first study to test the relation between the international fund performance and geography and contributes to the literature on funds and international investments.

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Managers are motivated to keep the funding ratio of a firm’s defined benefit (DB) pension plan from reaching its optimal level. This phenomenon can be explained by agency theory, which suggests that agency costs can be mitigated by a good governance structure. This study analyzes the effect of a firm’s corporate governance on the funding of its defined benefit corporate pension plan. The funding ratio is measured as the ratio of the current value of the plan’s assets over the pension benefit obligations (PBO). The sample includes 478 companies listed on the Korea Composite Stock Price Index from 2006 to 2018. The results indicate that firms with better governance tend to have higher funding ratios. As South Korea lacks mandatory regulations requiring firms to keep their pension funding ratio above a minimum level, firms can keep their ratio low. Good governance implies that a manager is required to maintain a higher ratio. In addition, sub-structures of governance, defined as components constituting the overall governance, have a meaningful relationship with the funding ratio. Important sub-structures include the ownership structure, the board of directors, and the labor union. This study has the following findings. First, a firm’s pension ratio increases with its corporate governance index. This result is stronger after controlling for the size of the firm. An implication of this finding is that good governance mitigates the agency problems of outside equity and debt, increases the funding ratio, and enhances firm value. Second, a firm’s pension funding ratio increases with the managers’ share-holding ratio. This result suggests that the managers decide to accumulate more pension assets as their interests become better aligned with those of shareholders. Thus, the ownership structure is an important component of the governance structure in that it affects the corporate pension policy. This paper also investigates the influence of outside shareholders on the funding ratio. Active outside shareholders are expected to monitor managers and mitigate the managerial incentive problem. The funding ratio increases with the foreign investor share ratio, which is a proxy for the extent of the alignment of interests between the managers and the outside shareholders. A fourth finding is that the funding ratio increases as the proportion of outside directors on the board increases after controlling for a nonlinear term. This result implies that firms are more active in accumulating pension assets if their board of directors are independent of the managers and so are more able to successfully mitigate the agency problem. Fifth, this paper measures the bargaining power of labor unions by looking at their affiliation with a nation-wide umbrella organization. A direct measure of labor’sthe bargaining power of labor, such as whether an individual firm has a labor union, is not practical, as almost all firms have labor unions. Affiliation with an umbrella union does not improve the funding ratio. SEuch an affiliation either fails to help the union enhance its bargaining power or it leads the union to engage in political issues instead of benefittingsupporting employees. These results are tested for robustness by adopting various specifications of the primary regression model. The alternative specifications include using alternative measure of the funding ratio, introducing lagged independent variables, controlling for endogeneity, performing sub-sample analyses, and using the funding ratio in excess of the relevant yearly industry average as the dependent variable. In South Korea, firms appear to have an incentive to underfund their defined benefit pension plan in the absence of mandatory regulation on the minimum funding level. This study suggest that better corporate governance mitigates various types of agency problems and thereby enhances firm value as a result of higher pension funding levels. In future work, it would be worthwhile to conducting a comprehensive study of the optimal level of pension funding. In general, if a firm’s pension funding level is too low, thereit may experiencebe agency problems or financial constraints at the firm; if a firm’s pension funding is above the optimal level, the its cash is being used inefficiently. An in-depth analysis of the labor union factors likely to be overlooked in corporate governance would also be beneficial. Studies could also examineing the relationship between corporate governance and pension asset management. There is growing controversy regarding the reasons behind the persistently dominant holding of interest-guaranteed assets over other types of assets by defined benefit pension plans. Researchers should also examine the introduction of a fund-type pension plan in addition to a contract-type pension plan, which is currently being discussed in South Koreais .

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P2P lending has emerged as an alternative financing tool, complementing existing financial systems by allowing investments and loans without collateral or guarantees through an online brokerage platform. By reducing the cost of financial transactions, P2P increases the efficiency of financial markets. This paper investigates how the investment information provided by a P2P lending platform affects the investment decisions for small business loans. Small business P2P loans play an important role in alternative financing for small businesses with financial constraints and difficulties obtaining loans from traditional financial institutions. We collect data from 2007 to 2017 on investment amount per capita and investment information for four P2P lending platforms: Lending Club in the U.S., Funding Circles in the U.K., and Eight Percent and Funda in South Korea. re The regression analysis yieldsare two main findings. First, the investment amount per capita increases when (a) the loan application amount is larger, (b) the loan period is shorter, or (c) the number of investors is smaller. T; this finding holds on all platforms. Second, how the investment amount per person changes with the loan interest rate depends on the type of platform. In a posted-price platform, which matches borrowers' capital demands with investors' funds at a predetermined interest rate (as is the case with Landing Club, Eight Percent, and Funda), the higher the interest rate, the higher the per capita investment. In contrast, on platforms such as Funding Circle, which is an auction platform wherein the loan interest rate and theloan amount are determined through an auction, the investment amount per person decreases as the loan interest rate increases, perhaps because investors interpret high interest rates as a sign of high risk. The regression analysis involving borrower information shows that Landing Club's business period information, Funda's business type information, and Eight Percent's loan objective information have statistical significance in determining the loan amount. In addition, the financial information on each platform and the credit-related information on Landing Club, such as bankruptcy information and overdue information, significantly influence the decisions on the investment amount per person. These results demonstrate the importance of providing investors with reliable borrower information to help them make investment decisions by reducing information asymmetry problems. These findings suggest that the financial constraints of low-credit borrowers can be reduced and financial efficiency improved by having more investors participate in P2P lending. The development directions of the domestic P2P lending market identified in this study are as follows. Most domestic P2P lending platforms are small. Their loans tend to beinvolve short-terms, and involveto comprise more real estate loans than business loans. Most platforms need to improve their lending field by focusing on credit lending rather than mortgage lending. The domestic P2P lending market is still too small for financial resource allocation. There is a need to improve the participation of institutional investors who can contribute to the growth of the P2P lending market. BecauseAs most domestic P2P loan platforms are small, it is necessary to support the growth of large specialized platforms designed to improve financing efficiency and investor protection. For domestic P2P lending to evolve into a viable alternative financing venue, platforms must develop their own credit risk assessment models and provide borrowers’ financial and credit information to enhance trust. Domestic P2P lending platforms must provide reliable information about borrowers' credit, as is done by Lending Club. Providing high-quality investment information to P2P lenders reduces the information asymmetry between borrowers and investors and improves the efficiency of the P2P lending market. To develop the domestic small business P2P lending market, the government should incentivize P2P lending investment and develop the legal basis for investment protection and investment activation. The results in this paper provide a useful basis for improving investment decisions in P2P lending markets and supporting the role of an intermediary in the platform. This study is unique in that it examines the factors influencing investment information from an investor's perspective, a gap in the literature caused by a lack of public data. This empirical study focuses on the factors affecting the investment in domestic P2P lending platforms by comparing these platforms with P2P lending platforms in the United States and the United Kingdom. To the best of our knowledge, this is the first study to compare the impact of investment information on investment decisions in Landing Club, Funding Circle, Eight Percent, and Funda, which act as P2P lending platforms providing small business credit.

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In the financial industry, many transactions are doneperformed covertly to secure an information advantage over competitors in the market. Trading also demands expertise in risk management and the valuation of the assets under consideration to determine which trades will create value for investors. BecauseAs information asymmetries contribute to profitability, iesthey are intentionally sought by asset managers, meaning that purposefully created information asymmetries are unavoidable and likely to persist within the financial market. It is tthatTherefore, the government must regulate the financial industry more stringently than other industries, such as technology-based manufacturing industries. Moreover, the intensity of separation between banks and other businesses is impacted by the extent of implicit information asymmetries, because the soundness of the finance industry can be severely injured by the very existence of information asymmetries. Being able to distinguish between the positive effects of information asymmetries, which should be encouraged, and the negative impacts of information asymmetries, which should be prohibited, is more important than ever before. This paper investigates this distinction through the regulations set up by of the government. The regulation of the finance industry goes back to the era of laissez-faire capitalism, when the 1907 financial panic resulted in the establishment of the U.S. central bank, the Federal Reserve System. In the aftermath of the Great Depression, financial regulation cul-minated in the Banking Act of 1933, also known as the Glass Steagall Act, which separated Wall Street (banking) from Mmain Sstreet (commerce). Fewer than ten years after the repeal of the Glass-Steagall Act by the Financial Services Modernization Act of 1999, known as the Gramm-Leach-Bliley Act, the Great Recession broke out in 2008. As the economy recovers, although with a lower growth rate, and with the development and deployment of information technology such as artificial intelligence, there is again pressure to deregulate but in a different context. The emergence of Iinternet only banks poses a quite different but daunting challenge to the conventional notion of the separation of banking and commerce. Internet only banks foster competition within the banking industry, which has become more oligopolistic in the aftermath of the Great Recession. As these entrants require huge investments in the technical infrastructure to operate properly through the Internet while offering banking services, the traditional regulation of share-holding limits, which has worked effectively since 1933, faces an apparent obstacle. To promote the resilience and reinvigoration of the banking industry, the Korean government lifted its share-holding limit regulation and opened a path for funds from the information and communications technology (ICT) industry sto participate in the share ownership in the banking sector in 2015. This was, a step in the right direction. However, non-ICT investors are still banned from the banking industry. In the meantime, non-ICT industry capital can still participate in the Iinternet banking sector indirectly, either through ownership build-up in an ICT firm or by mimicking an ICT firm under the guise of the ICT industry, circumventing the ban effectively. The new investors in the Internet banking industry demand a further relaxation in share ownership, leading to a call for scrutiny of whether further deregulation promotes competition in the banking industry and enhances the soundness of the financial industry. Desirable self-selection is an important goal, and good quality Internet bank applicants should be allowed to acquire Internet banking licenses while bad quality applicants should not. There is considerable concern as to whether the government’s current revision of the rule banning non-ICT investors from controlling Internet banks could lead to a sustainable separating equilibrium. This paper addresses this point and focuses on the adverse selection problem due to information asymmetries over the quality of prospective participants in the banking industry. The current combination of rules such as the share-holding limit and the loan concentration ratio could open the path to a desirable situation. As the lifting of the share-holding limit is accompanied by credit exposure control (particularly for the loan concentration ratio), it is possible that the ban benefits both Iinternet only banking participants and the government in light of the expected outlay in the case of a bailout due to non-performing loans. The paper demonstrates with a simple theoretical setup that a welfare enhancing outcome is within reach despite the separation lapse after we control the loan concentration ratio while allowing for greater ownership of Iinternet only banks by the ICT industry. This resultfinding will beis of great use to policy makers as they consider the implementation of new rules.

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We study a simple model in which arbitrageurs trade assets in infinitely repeated stages and a financial crisis may occur due to redemption requests of investors on arbitrageurs. If the asset is undervalued, the arbitrageurs buy the asset to make profits. But the mispricing may become even larger in the next period and the arbitrageurs will take huge losses temporarily. Even though the asset price will recover its fundamental value in the end, the temporary losses of the arbitrageurs can force the arbitrageurs to liquidate the funds due to the redemption requests and stay away from the market in all the subsequent stages. Thus, patience of arbitrageurs (the relative weight to the future profits) affects possibility of a financial crisis. This paper shows two properties on the discount factor. First, a financial crisis without external shocks can arise only when arbitrageurs are impatient, and second, if such a crisis may arise, high patience of arbitrageurs mitigates the crisis but enlarges the pre-crisis mispricing. The model setup mimics the modern financial markets and some of them may be viewed as market frictions which prohibit market efficiency. The simplicity of the model allows a closed-form solution.

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