This study examines the relationship between the Northeast Asian and U.S. markets with particular attention placed on the global financial crisis period. For this purpose, the paper employs dynamic approaches including DCC-MGARCH, BEKK and Risk Decomposition models to ensure the robustness of empirical findings. The results are as follows. First, The Northeast Asian stock market remains relatively independent from the U.S. market movements during the sample period. Second, the regional market shows an increasing trend of joint integration with the U.S. market. Third, an increased integration is found to be only unique to the crisis period. We find no evidence to support the findings of previous empirical studies which suggest the increased level of integration since the GFC.

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Most venture investments in Korea are from venture funds supported by limited partners (LPs), and thus LPs always want to know the main determinants of the fund performance and how well their funds are operated. General partners (GPs) who want to successfully receive the investments for their venture funds from LPs are also very interested in the same issues. This study measures the performance of Korean venture funds using the public market equivalent (PME), internal rate of return (IRR), and multiple measures. The features and determinants of each performance measure are then analyzed using actual Korean venture fund data. Few studies have addressed these issues, due to limited access to and a shortage of Korean venture fund data. This study is the first to use actual venture fund data to investigate the performance and its determinants. To accurately measure the performance of venture funds, the Net Asset Value problem must be addressed. However, this study is free from that issue because the sample only contains fully liquidated venture funds. The PME measure (average 1.07) shows that on average, Korean venture funds performed slightly better than the Korea Composite Stock Price Index market from 1992 to 2010. This result may appear disappointing, but it is too early to draw conclusions, as our sample only includesthe funds formed until the early 2000s. The IRR is the most volatile ofthe three measures (its standard deviation is 10.2 times the average), because it is influenced by vintage years and market situations, such as fund liquidation periods. The average is much higher than the median for all three of the measures, suggesting that some larger funds perform considerably well. We analyze the determinants of fund performance based on three factors—fund characteristics, fund operator characteristics, and market situation characteristics—and find not only that each performance measure has different determinants, but also that the latter’s explanatory power is higher for the PME measure than for the other measures. We also find that the PME and multiple measures exhibit similar patterns, whereas the IRR is biased as a performance measure. The determinants that explain the PME measure well are fund size, fund operation period, fund cash inflow and outflow, and the number of new fund formations. The determinants that best explain multiple measures are fund size and fund cash inflow and outflow. The best determinants for the IRR measure are fund size (negative relation), fund operation period, fund cash inflow, number of liquidated funds, and vintage year. For the PME and multiple measures, fund size has a U-shaped relation with fund performance, whereas it has a negative relation with the IRR measure. The fact that the funds smaller than $3 million perform well, especially for the IRR measure, is a unique feature of Korean venture funds not found in Harris et al. (2014), who studied U.S. venture funds. This suggests that the IRR can be highly biased for smaller funds. Remarkably, the shorter the fund’s operation period, the better the fund performance in the case of the PME measure, but not in the case of the multiple measures. The performance differences among the investment fields stand out for the PME and multiple measures (especially the latter), but are not found for the IRR. For the PME and multiple measures, IT-specialized funds exhibit the best performance, and bio-specialized funds the worst. General funds without specialized investment fields only outperform specialized funds for the multiple measure. Funds with more than two cash flowsperform better than those with only one cash flow for all three of the measures. However, the IRR only shows a statistically significant result for cash inflows (liquidation), indicating that it is biased toward fund liquidation. There is no significant difference in performance between corporate venture capital (CVC)and non-CVC, between financial and non-financial venture capital (VC), and between individual and non-individual VC for all of the three measures. The number of new funds during the fund formation period has a significantly negative influence on the PME measure, and the number of liquidation funds during the fund liquidation period negatively influences theIRR measure. Because the average operating period of Korean venture funds is five-and-half years, the data used for this study only cover the venture funds mainly formed before 2005. With more fund data from the 1980s, 1990s, and 2000s, as in the U.S., it would be possible to obtain more meaningful results. It is probable that we willunderstand more about the Korean venture fund industry once we reach the mid-2010s and have access to the performance results of venture funds formed during the 2000s, which was a booming period for the Korean venture capital industry.

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Risk aversion and time preference are fundamental variables when people make financial decisions, but there are numerous opinions for how to estimate them. Researchers frequently estimate the demand of financial products with an ordinary survey, where subjects provide self-perceptive information. Given that behavioral financial questions are included in the simple questionnaire, the subjects may misunderstand such questions, or may not be able to completely understand the importance of the concepts driving them. Therefore, subjective bias could be implicitly problematic in many surveys, rendering their results untrustworthy. Although researchers can draw their conclusions based on the data collected from the survey, the economic results may be distorted or prove insignificant. This study takes the behavioral and experimental economics explored in Kahneman and Tversky (1979) and applies those theories to a financial product, such as a single payment annuity. This is a relatively new product in Korea’s aging population, thus demand for it has not been analyzed in the Korean context, despite the popularity of such products in the U.S. (Mitchell and Utkus, 2003). Following the method of eliciting risk aversion proposed by Holt and Laury (2002), we develop a new measure of risk aversion that is modified using the quantile normalization (Bolstad et al., 2003), and use the measure to check for subjective bias when choosing an annuity product. Time preference is also very critical in financial decisions. We propose a time preference measure that follows Coller and Williams (1999) and use it as an objective measure of the subject’s time preference. We design an experiment in which the subjects are guided by the instruction and payoff schemes, and follow several sessions. The participants choose a lottery from a pair of lotteries whose payoffs and probabilities are different, revealing the participants’ risk aversion preferences. In the next experiment on time preference, the participants choose a lottery from a pool of several featuring different interest rate payoffs with higher and lower payment spans, depending on the interest rates. During the experiment, the participants’ choices reveal their time preferences for our analysis. In addition to the results of the aforementioned experiments, we collect the participants’ background information, such as financial status, financial literacy, and intelligence. Given the dataset, we can then find that the subjective answers from the survey are not significantly related to the financial decision on single payment annuity. This allows us to verify that the subjective bias exists, and confirm that self-perceptive surveys are not trustworthy in choosing financial products. We also compare the self-perceptive answers and the experimental measures to test which methods are more reliable and significant. The results show that neither approach significantly determines time preferences and risk aversion in some model specifications. We construct the bias variables of risk aversion, time preference, life expectancy, financial literacy, and intelligence using the differences between the subjective answers and experimental results. Thus, when we execute econometric models with the bias variables of interest, we discover that the biased self-perceptive and experimental measures of the time preference, risk aversion, life expectancy, financial literacy, and pension literacy are significant determinants of the demand for single payment annuity. Therefore, the preferential and behavioral variables are critical in choosing financial products such as annuities, rather than the self-perceptive answers in the survey. We also run a Heckman two-step regression of the premium of the single payment annuity and find that financial status and portfolio are the most crucial determinants, regarding the moneywise incentive. Finally, the time preference and risk aversion experiments we design reveal that behavioral and preferential biases are critical in choosing financial products. Therefore, we conclude that researchers should take bias variables seriously when they estimate the demand for financial products, even after controlling for other variables.

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We investigate the effectiveness of the original PIN model (Easley, Kiefer, O’Hara, and Paperman, 1996) and five variants of the adjusted PIN model (Duarte and Young, 2009) in the Korean stock market. Throughout the series of likelihood-ratio fitness tests, we find that the unrestricted version of the adjusted PIN model fits best in the Korean stock market data.

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The closing price of KOSPI200 on Nov 11, 2010, the expiration day for options, was determined at 247.51 points following a severe fall of 7.11 points, which caused great disorder in the Korean financial market. The Korean Supervisory Service and the Korea Exchange investigated the event and discovered that Deutsche Bank had submitted a huge sales order for 2.44 trillion Won of 199 stocks simultaneously, on condition of holding a large amount of KOSPI200 put options. Deutsche Bank was later indicted for the cross-market manipulation based on the Financial Investment Services and Capital Markets Act (hereafter “Capital Market Act”). In this paper, we investigate the cross-market manipulation using index arbitrage in determining stock closing prices on expiration days. We deal withtwo aspects in relation to this issue. First, in terms of law, we explain the various types of cross-market manipulation regulated by the Capital Markets Act. Specifically, we discuss the concept of “existence of purpose” to satisfy the requirement for cross-market manipulation action. Second, in terms of finance, the hypotheses to verify the “existence of purpose” on the cross-market manipulation are established and tested empirically. This empirical test is also related to Kumar and Seppi’s (1992) model, in which the manipulator earns a positive expected profit by holding a futures position and then manipulating the spot price used to compute the cash settlement on the expiration day. In empirical analysis, we identify that expiration effects exist in the Korean market, consistent with previous studies. The volatility and trading volume of the closing price on expiration days are distinctly higher than those on non-expiration days and those of non-KOSPI200 stocks. Then we establish the first hypothesis that if expiration-day effects are caused by index arbitrage activity, the effects are stronger in stocks where the trading volume for index arbitrage is higher. The results show that the portfolio with a greater transaction ratio of index arbitrage has higher volatility and trading volume on expiration days. The differences are statistically significant. The regression analysis using volatility and trading volume on expiration days as the independent variable and index arbitrage as the dependent variable also shows that volatility and trading volume on expiration days are positively correlated with index arbitrage. These results support our first hypothesis that index arbitrage are an important source of expiration-day effects. However, the positive relationship between the expiration-day effect and index arbitrage does not necessarily imply that cross-market manipulation activity exists in the market and affects the closing price on expiration days. Normal index arbitrage can also cause an increase in volatility and trading volume due to its tremendous trading size. To disentangle these two possibilities we use the order submission data of closing call auctions and establish the second hypothesis. Our second hypothesis is that a cross-market manipulator will submit a distinctly low-priced limit sale order or distinctly high-priced limit purchase order, both of which lack economic rationality, to move the closing price as much as possible on expiration days. According to the Kumar and Seppi (1992) model, the cross-market manipulator can earn a positive expected profit by manipulating the spot price used to compute the cash settlement on the expiration day because the profit from the futures position exceeds the loss from the spot position. Analysis of the index arbitrage order data in the closing call auctions on expiration days shows a significant increase in distinctly low-priced limit sale orders and distinctly high-priced limit purchase orders. The limit orders are also concentrated in the last minute of the closing call auction. Finally we test a third hypothesis to confirm the price impact of cross-market manipulation. Our third hypothesis is that orders for index arbitrage have a greater effect on price than other normal orders if there is cross-market manipulation on expiration days, because the manipulators try to maximize the price impact of their orders to maximize their profits in the futures position. The results show that the price impact of index arbitrage orders is larger than that of normal orders. Overall, these results imply that there exist index arbitrage orders issued for the purposes of cross-market manipulation on expiration days in Korea. The findings are also consistent with Kumar and Seppi’s (1992) prediction that cross-market manipulators try to manipulate the spot price used in cash settlement on the expiration day.

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A stock’s price crashes when bad news accumulated within the firm is released all at once. I suggest two incentives for bad news hoarding-managerial opportunism and overconfidence-and examine their effects on firm-specific stock price crash risk. In a corporate setting in which there is separation of ownership and control, managers have multiple incentives to conceal bad news, such as extracting rent, securing their jobs, maintaining reputations and meeting the conditions for extra compensation. Overconfident managers also have incentives to ignore negative news. They tend to overestimate the cash flows of investment projects and misperceive negative news as temporary or untrue. They are reluctant to disclose negative news because doing so might prompt investors to halt the projects. Thus, both opportunism and overconfidence can motivate managers to hoard bad news, which in turn can lead to stock price crashes. These two incentives are not, however, mutually exclusive. Opportunism assumes that managers are rational expected-utility maximizers, whereas overconfident managers are expected to behave according to irrational psychological traits. This suggests that overconfident managers can conceal bad news even if they are benevolent to shareholders. The difference allows them to empirically decide which incentive is the main source of the stock price crash. I use tax avoidance (long-run effective tax rate) as a proxy for opportunism because it is widely involved in managerial opportunistic decisions such as earnings management and resource diversion. As a proxy for firm-level overconfidence, I use a dummy variable constructed following Schrand and Zechman (2012). Overconfidence is a persistent trait that affects all business decisions, suggesting that the level of overconfidence can be inferred from the firm’s financial and investment decisions. Schrand and Zechman (2012) developed an overconfidence score using a list of financial and investment decisions typically conducted by overconfident managers. Following Chen, Chen, Cheng, and Shevlin (2001) and Hutton, Marcus, and Tehranian (2009), I use two measures of firm-specific stock price crash risk: the likelihood of extreme and negative firm-specific weekly returns and the negative conditional skewness of firm-specific weekly returns. Using non-financial firms listed on the Korea Stock Exchange for the 2001~2011 period, I find that while tax avoidance is positively related to stock price crash risk, overconfidence is not. The results are consistent with the hypothesis that opportunism motivates managers to hoard bad news, which leads to stock price crashes. The finding is robust when I control for firm-fixed effects and use alternative tax avoidance measures, such as the book-tax income difference and the long-term effective tax rate adjusted for earnings management. I also find that the relation between tax avoidance and crash risk is more pronounced in firms with greater information asymmetry. In contrast, information asymmetry does not help explain the relation between overconfidence and crash risk. I further examine the effect of investor protection on the relation between tax avoidance and crash risk. Investor protection variables include largest shareholder ownership, foreign ownership, proportion of outside directors, amount of external financing, big audit firm dummy, chaebol affiliation dummy and the disparity between control and cash flow rights. It appears that the effect of tax avoidance on crash risk is less pronounced for firms with greater investor protection. Specifically, firms with higher largest shareholder ownership and greater external financing, firms audited by big audit companies, non-chaebol firms and firms with lower disparity between control and cash flow rights all exhibit relatively weak relations between tax avoidance and crash risk. The results reinforce that opportunism is a more promising source of stock price crashes than overconfidence. Earlier studies have tried to find the determinants of stock price crashes, focusing on market mechanisms. Recently, related research expanded its focus to include firm-side mechanisms, but most studies have explained stock price crashes using the agency framework. This study complements those works by suggesting a managerial behavioral trait as a source of stock price crashes.

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As a number of studies in macroeconomics attempt to explain the business cycle and asset pricing using firm dynamics, there is a growing interest in understanding how firms make financing decisions about the use of debt and equity in varying stages of the business cycle. Most of the studies, however, have overlooked the possibility that the cyclical behavior of equity issuance is different from that of debt issuance. They focus mainly on the procyclicality of debt financing or external financing in total. Similarly, little work has been done in corporate finance literature also on the cyclicality of firms’ financing behavior. The main concern there is to control macroeconomic factors in testing the traditional capital structure theories. Because the business cycle changes the amounts of debt and equity to be raised, which in turn influences the business cycle through corporate investments, it is meaningful to look into the cyclicality of debt and equity financings. Previous studies reveal conflicting views on the cyclicality of debt and equity financings. Using the NBER Business Cycle Data, Choe, Masulis, and Nanda (1993) find that the amount of equity raised is larger in expansion periods than in contraction periods, whereas the opposite is true for the amount of debt raised. However, because they only analyze a subset of external financing vehicles such as common stocks and corporate bonds, they fail to control the influences of large firms with relatively easy access to financial markets. Korajczyk and Levy (2003) document that the debt-equity ratio increases during recessions. But the use of the debt-equity ratio implicitly assumes that debt and equity financings are substitutes for each other, and thus rules out the possibility that they show the same cyclical behavior. Moreover, the macroeconomic variables used by Korajczyk and Levy (2003), such as equity market returns and term spreads, are not the typical measures of cyclicality in macroeconomics literature. While the two aforementioned studies argue that equity issuance is procyclical and debt issuance is countercyclical, Jermann and Quadrini (2012) claim that equity financing is countercyclical and debt financing is procyclical. They use the flow of funds data from the Federal Reserve Board. But their dataset does not include all of corporate debt and equity transactions, and thus it is strongly influenced by a small number of large firms and by the procyclicality of mergers (Baker and Wurgler, 2002). To overcome the limitations of the preceding studies, Covas and Den Haan (2011) divide firms into several groups by size and investigate the cyclicality of small firms’ financing behavior separately. They also construct a comprehensive time-series dataset of debt and equity issuances using the accounting data for individual firms in Compustat, instead of using the aggregate data that may cause a biased result due to the effect of large firms. Moreover, as with other studies in business cycle literature, they filter the real GDP or the value added by the Hodrick-Prescott (HP) method and use it as a measure for real activity. Unlike the results of the preceding studies, their finding is that both debt and equity financings are procyclical. Regarding this result, Jermann and Quadrini (2012) point out that the procyclicality of equity issuance is not robust because its statistical significance varies depending on how equity issuances are measured. In this study, we examine cyclical patterns of debt and equity financing in Korean firms. Contrary to the results of Covas and Den Haan (2011), we find that the equity issuance of Korean firms is countercyclical. In a macroeconomic-level analysis using the flow of funds data from the Bank of Korea, the use of debt is positively correlated with the HP-filtered GDP of the previous quarter, whereas the use of equity is negatively correlated. In a firm-level analysis using the accounting data of individual firms, we find the same result-that debt financing is procyclical and equity financing is countercyclical. In particular, the countercyclicality of equity issuance has become stronger after share repurchases were permitted in 1994. This result stands in contrast to the case of U.S. firms, in which both debt and equity financings are procyclical. To explain why equity financing is countercyclical in Korea, contrary to the U.S. case, we extend the panel regression model used in Covas and Den Haan (2011) and explore how debt and equity financings, investments, and asset growths in corporations respond to the cyclical movements of the economy. Following Covas and Den Haan (2011), we allow coefficients to vary with firm size. We also use cash flows and Tobin’s Q, respectively, as explanatory variables for current and future profitabilities. In addition, for the purpose of controlling collateral value, investment opportunity, non-interest tax-shields, and the effects of economic crises, respectively, we include tangible assets, intangible assets, depreciation, and time dummy variables for two economic crises. We find that the use of debt is procyclical for all firm groups and the use of equity is countercyclical for bigger firms. This result is consistent with that of the correlation analysis. While investments and asset growth are significantly procyclical for all firm groups, total assets vary more than investments as the business cycle changes. This implies that firms use financial assets as a buffer to insure against negative shocks during contractions. Interestingly, cyclical changes in debt are larger than those in total assets in Korea. This indicates that to finance the purchase of assets, Korean firms rely mostly on debt in boom periods, whereas they use equity only when it is difficult to raise debt in downturn periods. By contrast, U.S. firms utilize debt, equity, and retained earnings all the time to finance investment projects. The discrepancy between the two countries indicates that the cyclicality of corporations’ financing behavior is determined not only by the substitutability of debt and equity, but also by such dynamic factors as the availability of internal funds and the difficulty of accessing the debt market.

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By using country-level data on the foreign affiliates of U.S. global banks in 20 developed and 60 emerging economies from 2006 to 2013, we present consistent evidence that liquidity shocks triggered by a global financial crisis are transmitted to affiliate locations that are important for the parent bank funding sources within the banking group. We find that the funding location of global banks is driven by affiliates’ dependence on local deposit funding, by host country-specific characteristics (financial liberalization), and by foreign affiliate-specific characteristics (liquidity constraints). As a result of foreign affiliates’ support to their parent banks, funding location may suffer internal capital outflows during a financial crisis. We conclude that internal capital outflows are confined to local funding affiliates with sufficient liquidity operating in fully liberalized financial systems. These results indicate that contrary to the findings of Cetorelli and Goldberg (2012), foreign affiliates financed by local deposits rather than a parent bank’s resources were not necessarily a significant source of internal capital outflows from the host country during the global financial crisis. Hence, the benefits of local funding can be achieved without its cost if either high liquidity constraints or low financial liberalization is in place.

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This study investigates the capital market reactions to announcements of seasoned equity offerings (SEOs), earnings management activities during the year before an SEO, and the decline in post-SEO stock performance. Although previous studies focus on the type of SEO and earnings management behavior, we classify SEO firms into two subsamples, those in which the largest shareholders increase their shareholding ratio and those in which they decrease their shareholding ratio, to examine management incentives that protect the wealth of existing shareholders. The announcement of an SEO in which the largest shareholders participate is good news for the market. We first seek to examine whether the response of the capital market to an SEO in which the largest shareholder’s shareholding ratio increases is more positive than its response to an SEO in which the largest shareholder’s shareholding ratio decreases. Because the cash flow of an SEO is dependent on the stock price, the management has an incentive to temporarily raise the stock price to maximize the existing shareholders’ wealth in SEO cases where the largest shareholder’s shareholding ratio decreases. Therefore, our second hypothesis is that there is greater earnings management, involving increased reported earnings, in the year before an SEO in which the largest shareholder’s shareholding ratio increases than an SEO in which it decreases. The decline in post-SEO stock performance in cases where the largest shareholder’s shareholding ratio decreases is more severe than in cases where it increases, because post-SEO performance is driven by accrual reversal. Therefore, our third hypothesis is that there is higher post-SEO stock performance in cases where the largest shareholder’s shareholding ratio increases than in cases where it decreases. The empirical results of this study are as follows. First, the cumulative abnormal returns (CAR) around the announcement date of SEOs in which the largest shareholders’ shareholding ratio increases is higher than the CAR around those in which the ratio decreases. This provides support for our first hypothesis that the capital market responds more positively to SEOs in which the largest shareholder’s shareholding ratio increases than to SEOs in which the ratio decreases. Second, the relationship between discretionary accruals during the year before an SEO and the change in the largest shareholder’s shareholding ratio is negative. This is consistent with our second hypothesis that there is more earnings management to increase reported earnings during the year before SEOs in which the largest shareholder’s shareholding ratio decreases than SEOs in which the ratio increases. Third, the relationship between the three-month buy and hold abnormal returns of SEOs and the change in the largest shareholders’ shareholding ratio is positive. This partially supports our third hypothesis that there is higher post-SEO stock performance in cases where the largest shareholder’s shareholding ratio increases than in cases where the ratio decreases. Overall, our findings show that the greater the change in the largest shareholder’s shareholding ratio, the more positive the capital market reaction to the SEO announcement, the less the earnings management, and the higher the post-SEO stock performance. The results can be explained as the incentive of management to protect the wealth of existing shareholders. We make several contributions to the literature. First, we investigate SEOs by classifying SEO firms into two subsamples, those in which the largest shareholders increase their shareholding ratio and those in which they decrease their ratio, to examine management incentives to protect the wealth of existing shareholders. Our study differs from others in the literature, which focus on the type of SEO and earnings management behavior or market responses to SEOs. Classifying firms by the change in the largest shareholder’s shareholding ratio is a more feasible way to examine management incentives to protect the wealth of existing shareholders than classifying them by the type of SEO, because the type of SEO is associated with the participation of existing shareholders. For example, in the case of a general cash offer, the largest shareholder can either participate in an SEO or not, or stand by the rights offer because there are no mandatory regulations. The largest shareholders can increase their shareholding ratio through third party allocation in cases where the third party is the largest shareholder. Our results showing that the largest shareholder’s shareholding ratio increases through SEOs in the Korean capital market explains why the positive market response to the announcement of SEOs in Korea is different from the negative market response in other countries.

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We examine how competitive threat in a product market, as an external environmental factor of the firm, influences corporate risk-taking behavior. Product market competition as a control mechanism is an issue of growing importance in the academic field of corporate finance (Giroud and Mueller, 2011; Kim and Lu, 2011). Firms in competitive industries have high investment and bankruptcy risks and low marginal profits, and thus need to lower their production costs to gain a competitive edge. Moreover, to decrease the cost of capital and signal the firm’s reputation to the market, firms should reveal their inside information and alleviate information asymmetry. Competitive threat is also an important factor in agency theory, as it is related to managerial compensation (Karuna, 2007) and to management’s pursuit of private benefits of control. In sum, competitive threat influences managerial decisions in various ways. Therefore, we investigate the relationship between competitive threat and firms’ risk-taking behavior to better understand its role as an external control device. The relationship between product market competition and corporate risk-taking behavior is not yet theoretically defined; therefore, empirical evidence from this study will provide significant academic and practical implications. One strand of the literature argues that managers should be reluctant to pursue risk in a competitive environment, due to the high risk of bankruptcy (Griffith, 2001) and high turnover sensitivity based on performance. Managers are expected to build conservative investment portfolios to lower the cost of capital. A similar argument is that competitive threat mitigates the risk-pursuing behavior of management based on the overinvestment incentive (Alchian, 1950; Stigler, 1958). The other strand of the literature argues that firms in competitive industries pursue more risks to acquire market power and a competitive edge. Under strong competition, managers are endowed with greater discretion to make managerial decisions quickly (Hubbard and Palia, 1995; Christie, Joye, and Watts, 2003), and hence can take risks to make large profits. In addition, in a competitive environment with lower profits, managers might pursue higher risks to increase their monetary compensation (Hernalin, 1992; Raith, 2003), or pursue private benefits by overinvesting in risky projects. We empirically investigate which of these two competing theories is supported in the Korean economy. This is the first study to empirically examine the effect of product market competition on corporate risk-taking behavior in the Korean economy. External factors that influence risk-taking behavior are not actively discussed in the academic field, thus we aim to fill this academic gap. Moreover, we extend recent studies that analyze the effect of product market competition by investigating its effect on firms’ risk-taking behavior. Under the agency theory, we test the disciplinary effect of competition in the Korean product market and explain how it disciplines managers or agency problems based on the risk-taking behavior of controlling shareholders. We use firms listed on the Korean Stock Exchange and run regressions while controlling for various firm characteristics and environmental factors. Measuring the level of product market competition, we use the Herfindahl-Hirschman index, which is commonly used in the field of corporate finance and industrial organization. To estimate corporate risk-taking behavior, we follow previous studies in using the standard deviation of the profit or net income over the past five years, standardized by total assets. Empirically, we find that competitive threat has a significantly negative effect on corporate risk-taking behavior. This means that managers burdened by high investment risks and bankruptcy costs in more competitive product markets do not want to form risky investment portfolios. It also implies that competitive threat can be considered as an external control device in the agency framework. The result is robust to control of the potential endogeneity problem, and to the use of alternative proxies for the level of product market competition and corporate risk-taking behavior. Furthermore, we find similar results when we perform an industry-level analysis. Our result is more strongly observed in firms with a low market share and those that do not belong to business groups. Meanwhile, examining the effect of the interaction between corporate governance and product market competition on corporate risk-taking behavior, we find that firms with good corporate governance are less likely to pursue risk. However, the negative effect of corporate governance on corporate risk-taking behavior exists only in less competitive product markets. We interpret this result as indicating that there is a substitution effect between internal corporate governance and competitive threat in product markets in determining corporate risk-taking behavior.

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