This study examines the chronology of regulations and policy implications for two features embedded in convertible bond (‘CB’) contracts: the option to adjust the conversion price downwards when the stock price falls (i.e., the ‘refixing option’) and the call option designatable to a third party (i.e., the ‘call option’). We provide the summary of this study as follows. First, we investigate the change in legal regulations regarding refixing options. CBs with the refixing option emerged in the late 1990s. In the early 2000s, the Financial Services Commission (‘FSC’) recognized a problem that the refixing option dilutes the interest of existing shareholders as the stock price falls and thus enacted a rule for setting the lower limit of the conversion price. However, the problem persisted. In 2021, the FSC revised the rule, requiring an upward adjustment, following a prior downward adjustment, to the conversion price, prompted by an increase in the stock price. The revised rule is applicable to applicable to privately-placed CB. Under the revised rule, the cap for the upward-adjusted conversion price is allowed to be set lower than the initial conversion price. Thus, the rule does not effectively eliminate the refixing option. We believe that strengthening the regulation of refixing options is necessary. We also examine the accounting issues for refixing options. After the adoption of the Korean International Financial Reporting Standard (‘K-IFRS’) in 2011, conversion rights (‘CR’) are recognized as a derivative liability and should be measured at fair value in every reporting period. This accounting treatment may lead to significant valuation losses for CR and an increase in liability when stock prices rise. In extreme cases, certain firms face the risk of delisting from the exchange. To address this issue, in 2022, the Korea Exchange (‘KRX’) revised a listing maintenance rule for screening criteria for delisting. The revised rule excludes valuation losses on CR due to refixing options from pre-tax income. In accordance with the KRX rule, the Korean Accounting Standards Board amended the accounting standard, which mandates firms to disclose valuation gains and losses on financial liabilities with refixing options separately from pre-tax income. Another issue with the accounting treatment for refixing options is that some treat CR as debt based on K-IFRS, while others treat CR as equity based on the Financial Supervisory Services(‘FSS’)’s interpretation on the accounting for refixing options. We believe the regulators should address the issue on this interpretation. Next, we examine the change in legal regulation of call options. In 2013, CBs featuring call options emerged to circumvent the legal prohibition of detachable BWs, which are allegedly utilized to strengthen the controlling power of the largest shareholder. The issue with CBs featuring call options is that the issuer designates call option recipients (mainly, the largest shareholders) only when the stock is convertible, thereby enabling them to purchase stock at a strike price lower than the prevailing market price. In 2016, when the market became aware of issues of CBs featuring call options, the FSS modified the disclosure format of CB issuance. But this approach proved ineffective. In 2021, the FSC implemented rules to impose a limit on the exercise of call options by the issuer's largest shareholder up to the ownership rate prior to the issuance of CB and to require issuers to provide detailed disclosure on the exercise of call options in both publicly and privately-placed CB. However, the rules do not effectively address the problem that exclusive benefits from call options are given only to those designated by CB issuers, and not to other shareholders. Another issue with CBs featuring call options pertains to issuers’ own CBs, which is not retired after redemption but remains resalable. The resale of issuers' own CBs is economically similar to CB featuring call options. However, considering that the resale of issuers' own CBs is subject to more misuse than call options, additional regulation on it is necessary. We investigate the accounting treatment for call options. Most firms had not accounted for call options in CB since their emergence in the market. In 2022, upon recognizing this fact, the FSC issued a supervisory guideline requiring issuers to recognize call options as financial assets separately from CBs in their financial statements. However, the guideline is limited to call options only. Under the current accounting standard, issuers' own CBs are not recognized in financial statements. We believe regulators need to mandate issuers to disclose more information about their own CBs. Lastly, this study discusses the applicability of the 2021 regulation to the following convertible instruments: bond with warrants (‘BW’), exchangeable bond (‘EB’), convertible preferred stock (‘CPS’), and redeemable convertible preferred stock (‘RCPS’). BWs are subject to the regulation for CB as well. However, EBs are not subject to the regulation. Particularly, a set of EBs exchangeable to the issuer's treasury stock needs to be regulated at a level comparable to that of CBs due to their economic equivalence. In 2023, the FSC revised the rule to extend the 2021 regulations to include CPS and RCPS. Nevertheless, the regulations for CPS and RCPS remain less sophisticated than those for CB and BW. Overall, our study suggests that further regulatory measures for the two options are warranted to secure the fairness of the market.

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Prior studies show that momentum is induced because investors underreact to information when anchored by the 52-week high (52WH). We propose the possibility that investors’ anchoring bias could vary over time. Accordingly, we develop an alternative momentum strategy, namely thedynamic 52WH (denoted as D52WH) momentum,that buys (short sells) stocks with the nearness to the 52WH ranked in the top (bottom) 10% of the historical distribution. We show that the D52WH momentum not only generates significant profitability but also outperforms the 52WH momentum. In addition, amajor advantage of the D52WH momentum is that it experiences considerably weaker momentum crashes. Further evidence shows that the D52WH momentum is more pronounced under limited investor attention and lower shorting activities, thus confirming the underreaction-driven return predictability implied by the anchoring bias.

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Banks’ credit management impacts the terms of lending, and diversification of loan portfolios and thus affects the total loan delinquency ratios. We find that the rising shares of recurring payment mortgages, one of the policy measures of restructuring mortgage loans since the second half of 2015, made positive contributions to banks’ asset management by improving credit management in the process of evaluating borrowers’ credits. Banks differentiated lending interests for mortgage borrowers even when their bank-issued credit ratings were the same in consideration of the differences in credit ratings that the credit bureaus (CB) issue. Using individual bank-level monthly data from September 2015 to May 2018, to explain the total loan delinquency ratios, we consider the banks' lending behavior on small and medium-sized enterprise (SME) loans, recurring payment mortgages, one-time payment mortgages, personal loans, and personal lines of credit. During the period, the Bank of Korea maintained its base interest rate between 1.25 percent and 1.75 percent and we focus on the share of high-interest loans (over five percent) for relatively low-credit borrowers. We also include the business cycle, return on financial asset (KOSPI), changes in the foreign exchange rate (KRW/USD), and real interest rate that could affect borrowers’ payment ability. We adopt the system-GMM estimation to correct bias caused by the problem of endogeneity as financial ratios can be affected simultaneously by the bank management. The system-GMM has some advantages over the fixed effect model since it deals with the omitted bias for some time-varying variables such as the CEO’s trait. Among fifteen commercial banks, nine banks experienced CEO turnovers during the period. Macroeconomic variables are significant determinants of the banks’ total loan delinquency ratios. A rise in economic activity, an increase in stock prices, and domestic currency depreciation against USD can positively impact bank asset quality. However, a rise in real interest rates can worsen bank asset quality. Banks’ total loan delinquency ratios could be varied by varying both the composition of the loan types and the credit structures of the banks’ loans. While the increase of high-interest loans for non-prime borrowers in new SME lending raised the total loan delinquency ratios, the increase of high-interest loans for non-prime borrowers in new recurring payment mortgages lowered the total loan delinquency ratios. This is due to the differences in the credit structures of non-prime borrowers of high-interest loans between SME loans and mortgage loans. Moreover, we analyze how the banks determine the lending interest rates for household loans and SME loans as it matters to asset quality. The Korea Federation of Banks provides the bank-issued credit ratings of household loan borrowers into five categories, from 1~2 grades at the top to 9~10 grades at the bottom as well as the CB credit ratings. The stages of bank-issued credit ratings of SME loans are 1~3 grades at the top, grade 4, grade 5, grade 6, and 7~10 grades at the bottom. For household loans, even when the bank-issued credit ratings are the same, we find a fair amount of heterogeneity in the lending interest rates depending on the differences in borrowers’ CB-issued credit ratings. This implies that banks’ credit management has improved since the second half of 2015. We especially focus on low-credit borrowers of mortgage loans whose bank-issued credit ratings are 7~10 grades. There exist noticeable differences in the borrowers’ CB credit ratings depending on the types of mortgage loans. For low-credit borrowers of high-interest mortgage loans, the average CB credit quality of the recurring payment mortgages is superior to that of the one-time payment mortgages. This explains the reason why the rising shares of high-interest recurring payment mortgage loans lowered the total loan delinquency ratios of commercial banks. Local banks are more active players in the process of this diversification than nationwide banks. For SME loans, the bank-issued credit ratings significantly affect the lending interest rates. When it comes to the credit qualities of borrowers, the default probabilities of the non-prime borrowers of SME loans are more widely distributed with higher upper and lower bounds than those of household loan non-prime borrowers. The average default rate is much higher in SME loans compared to household loans, which reinforces the importance of credit structures in bank-loan diversification and explains the reason why rising shares of high-interest loans in new SME loans worsened the bank asset quality. Improving the bank’s management efficiency in SME loans could benefit the banks as it provides some opportunities to improve banks’ asset quality in the process of bank-loan diversification in efforts to lower the risk level associated with their bank-loan portfolios. Banks adjust their lending interest rates in consideration of return on asset (ROA), costs, and other factors as well as borrowers’ credits. Our findings suggest that bank-loan portfolio diversification and efficient bank credit management together can reduce the bank’s total delinquency ratios.

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The level of pension assets that can cover pension liabilities in firms that operate defined benefit (DB) pensions and the management of pension assets is important information that affects the valuation of the companies in the capital market. This study analyzed the effect of the underfunded risk of DB pension plan on stock returns for firms listed on the Korea Exchange. We examined the relationship between the pension funding ratio and the stock return through multivariate analysis including firm characteristic variables for companies that adopted the DB pension system from 2013 to 2022, when the minimum funding ratio of plan assets for DB was gradually raised in the Employee Retirement Benefit Security Act(ERBSA). The main results of this study are summarized as follows. First, during the sample period, pension funding ratios increasd in accordance with the minimum funding ratio provisions specified in the ERBSA. In addition, the level of the funding ratio and the behavior of asset allocation focused on safe assets showed strong persistence throughout the sample years. Second, for portfolios sorterd by the pension funding ratio, the alpha (risk-adjusted excess return) from the factor model was estimated to be a statistically significant negative sign in the portfolio with high funding ratio, while no statistical significance was found in the portfolio that did not meet the minimum funding ratio. These results imply that the stock prices of firms that meet the minimum funding ratio exhibited the tendency of overvaluation in the market. Furthermore, it was confirmed that such pricing errors are a dominant results in companies that met the minimally required funding ratio but did not meet the overfunding ratio. Third, the robustness of the portfolio analysis results estimated by the factor model was confirmed through panel regression analysis. As a result of the analysis, firms that do not meet the minimum funding ratio show higher stock returns as the funding ratio is lower (the higher the underfunding risk), but firms that achieve the minimum funding ratio do not explain changes in returns. However, even if the minimum accumulation ratio is achieved, companies that do not fully overfunding ratio show an increase in stock returns as the funding ratio increases. These results support the analysis of the factor model earlier, and imply that investors neglected the underfunded risk for firms that have met the minimum funding ratio but do not fully cover the pension liabilities, so the underfunded risk is not reflected in stock price.

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In this paper, we examine the crowded equity positions fomented by foreign investors in the Korean stock market. As the participation of foreign investors accelerates globally, understanding the impact of foreign investors on the stock market has become central. Specifically, as groups with shared common interests or information often engage in similar actions, it is widely recognized that foreign investors "flock together" or "herd" in the stock markets. This influence of foreign investors can have dual effects. On the one hand, their participation can facilitate price discovery by quickly reflecting information in the stock market. On the other hand, it can lead to liquidity shortages, potentially causing a trigger for fire sales. Consequently, there has been a long-standing discussion about the participation of foreign investors and its potential to cause destabilization in the stock markets. However, studies on the impact of foreign investors in the Korean stock market are still limited, with a focus on their trading volume or ownership. This paper aims to bridge the gap by examining the crowded equity positions by foreign investors. Crowdedness is a situation where the ownership proportion of a specific group of stocks is excessively high compared to their liquidity. We focus on the crowdedness of foreign investors by calculating the shareholdings of the foreign investor group as a percentage of average daily trading volume, which is called Days-ADV. Days-ADV shows the time it takes for the foreign investor group toliquidate their holdings of the respective stock. Therefore, even if the ownership is low, Days-ADV can be high if the turnover rate of the stock is low, while even if the ownership is high, Days-ADV can be low if the turnover rate of the stock is also high. As evident from the definition, this proxy enables a more direct examination of the impact of foreign investors’herding behavior on stock prices by incorporating their ownership and stock liquidity. Our research investigates the impact of foreign investors on the Korean stock market, with Days-ADV as our key variable of interest. The results of our study are as follows. First, portfolio-level analyses and firm-level cross-sectional regressions indicate a significant positive relation between the Days-ADV and stock returns in the subsequent month. For example, the high-minus-low (H-L) Days-ADV portfolio, which buys the top 20% of stocks and sells the bottom 20% of stocks based on the rank of the Days-ADV at the end of the month, yields a return of 1.32% (t-statistic = 2.97) in the following month. Furthermore, this positive premium of the Days-ADV is not driven by foreign ownership or illiquidity. It implies that the Days-ADV, a composite measure of foreign ownership and illiquidity, provides additional information on future stock returns. Second, we find no evidence that the crowdedness of foreign investors leads to relatively larger drawdowns during distress periods. During the crisis period, the high Days-ADV portfolio exhibits a significantly negative return of -1.82% (t-statistic = -2.20). However, in comparison, the H-L portfolio still shows positive return of 1.29% (t-statistic = 1.19). Lastly, we find that the Days-ADV predicts future earnings surprises significantly in a positive direction. The predictive power is most pronounced for the upcoming earnings announcement and gradually diminishes over time; the predictive power remains significant for up to the following three quarters’ earnings announcements. We also find that the abnormal return of the H-L portfolio based on the crowdedness of foreign investors is intensified in stocks with higher sensitivity to export growth, the S&P 500 index, and won-dollar exchange rates. These findings support the argument that the return predictability of the crowdedness of foreign investors could occur as they flock to specific stocks through information superiority. This study contributes to the understanding of the impact of foreign investors’ behaviors in several ways. First, this is the first study to examine the impact of the crowdedness of foreign investors on stock returns in the Korean stock market. In contrast to previous studies that primarily focus on the effects of foreign investor ownership or herding behaviors, this study introduces a new anomaly based on the crowdedness of foreign investors. Second, our study aids in understanding whether the crowdedness of foreign investors triggers fire sales during the exogenous shock period. Lastly, our paper helps to understand the factors underlying the abnormal returns generated by the crowdedness of foreign investors. We expect that these results shed light on the role of foreign investors in the Korean stock market and the impact of crowdedness by investor groups on stock prices.

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This paper provides a comprehensive overview and synthesis of extensive domestic and international studies in the private equity market. It delves into encompassing a range of topics including performance, characteristics, risk management, the role within the financial system, and activism, pertaining to hedge funds. Additionally, it explores research focused on performance, GP and LP dynamics, portfolio company, and the legal and macroeconomic ramification, associated with private equity. Regrettably, the majority of the synthesized studies are a global nature, with the Korean literature predominantly centered around VCs due to limitation in data collection. By contrasting international and domestic studies, this paper draws forth significant implications for the Korean private equity market. These implications encompass various aspect, such as revisiting hedge regulations, the reinforcement of hedge fund activism, a reevaluation of the GVC-centered venture capital industry policy, the amplification of VCs’ roles in the IPOs of their portfolio companies, and the exploration of methods to augment value within portfolio companies backed by PE funds.

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This study analyzes the relationship between the psychological price barrier of investors and the phenomenon of short-term return reversal in the Korean stock market. The short-term return reversal phenomenon is an unexplained anomaly in finance. It is usually measured using returns from one month ago. Jegadeesh (1990) and Lehmann (1990) suggest that short-term return reversal may occur due to factors like illiquidity or investors' overreactions. Behavioral finance posits that individual investors are irrational and tend to overreact to private information. Kahneman and Tversky (1979) introduce the concept of the anchor effect, wherein investors rely on reference points for decision-making, similar to a ship anchored and unable to move beyond the length of its anchor line. In the context of behavioral finance, the 52-week highest price serves as a reference point, inducing irrational behavior among investors. Investors treat the 52-week highest price as a psychological barrier, and when stock prices approach this level, they become excessively pessimistic about the asset's prospects. On the other hand, when stock prices are distant from the 52-week highest price, investors tend to hold optimistic views, anticipating that the asset's price will rise. We believe that the psychological price barrier influences investor trading behavior and has a significant impact from a liquidity supply perspective. Therefore, this study builds on prior research to investigate how investor trading behavior and overreactions affect short-term return reversal. It hypothesizes that the 52-week highest price acts as a psychological price barrier, leading to specific expectations. Investors tend to be overly pessimistic about stocks trading near this barrier, hesitating to purchase them. The overreactions of these pessimistic investors do not significantly impact stock returns. In contrast, when stock prices deviate from the 52-week highest price, investors become optimistic, anticipating potential price increases, leading to temporarily overvalued stocks with lower future returns. The study employs common stocks listed on the Korea Exchange (KRX) and the KOSDAQ market from January 2000 to June 2022, with research data obtained from DataGuide. The analysis period starts in January 2000, considering that investor-specific net purchase quantity data is available from January 1999. We conduct empirical analysis using double-sorted portfolio analysis, Fama and Macbeth cross-sectional regression analysis, and triple-sorted portfolio analysis. We use the inverse of the 52-week highest price as the psychological price barrier and consider it based on the month t-1. The reason for using the t-1 month's psychological price barrier is to alleviate concerns that it might have similar effects to short-term return reversal. Also, it's assumed that there is a one-month lag for information about the psychological price barrier to flow into the market and influence investor behavior. Short-term return reversal represents the stock returns in month t. The main findings are as follows: First, the 52-week high's psychological price barrier significantly influences short-term return reversal. The further stock prices are from this barrier, the more pronounced the short-term return reversal becomes. Conversely, when stock prices are close to the 52-week high, the influence of short-term return reversal diminishes. This indicates that the psychological price barrier alters investor trading behavior, leading to overreactions and short-term return reversal. Second, utilizing cross-sectional regression analysis, the study controls for firm-specific factors and reaffirms the impact of the psychological price barrier on stock returns and short-term return reversal. Stocks positioned far from the psychological price barrier exhibit a strong and significant short-term return reversal effect. Additionally, the interaction of psychological price variables and previous month returns shows a significant negative predictive power on stock returns. Third, the study investigates factors that enhance the relationship between the psychological price barrier and short-term return reversal. Prior research highlights that idiosyncratic volatility, lottery-like stocks, and unrealized capital gains overhang play a crucial role in this relationship. Triple-sorted portfolio analysis shows that stocks with idiosyncratic volatility, lottery-like stocks, and unrealized capital losses demonstrate more pronounced changes in investor trading behavior due to the psychological price barrier. This results in a significant short-term return reversal effect due to investor overreactions. In conclusion, the research emphasizes how the psychological price barrier influences investor trading behavior and contributes to short-term return reversal in the Korean stock market. This sheds light on the impact of investor irrationality on the anomaly of short-term return reversal, offering valuable insights for related fields.

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Analysts process various information about firms to provide market participants with earnings forecasts and recommendations. There are both positive and negative views on the usefulness of analyst reports and investment recommendations. Liu et al. (1990) argue that analysts’ stock recommendations are valuable as investment information, as they find that stocks recommended as "buy" by analysts tend to yield positive excess returns, while stocks recommended as "sell" tend to yield negative excess returns. However, according to studies by Bhushan (1989), Irvine (2000), Brown et al. (2015), analysts face conflicts of interest such as the incentive to increase commissions for their affiliated brokerage firms or maintain close relationships with the management of companies. Due to these conflicts of interest, they suggest that the analysts’ recommendations are biased information. Accordingly, analysts can play a role in enhancing market efficiency by providing reports with high-quality information that helps reduce misvaluation of stock prices. However, due to economic conflicts of interest, the possibility remains that analysts might overestimate companies for personal gain, potentially misleading investors and increasing the misvaluation. IPO (Initial Public Offering) underpricing refers to the phenomenon where the offer price of newly issued shares is set lower than their fair value, resulting in the shares being underpriced. As a consequence, the stock price rises significantly higher than the offer price in the aftermarket, leading to substantial initial returns. Previous studies report that IPO stocks tend to exhibit abnormally high initial returns but experience lower returns in the long term (Ritter, 1991; Loughran and Ritter, 1995; Kim and Lee, 2012; Kim, 2016). In the U.S. stock market, a ‘quiet period’ is applied for firms preparing for IPO to protect investors (Bradley et al., 2003; Jia et al., 2019). IPO firms might have incentives to inflate future business prospects and earnings forecasts to obtain a higher valuation for their offer price. The U.S. Securities and Exchange Commission (SEC) has established the quiet period around the IPO date to prevent companies from providing predictive information related to firm valuation, such as sales, operating income, net income, that could influence the offer price and stock price. Unlike the U.S., the Korean stock market does not impose a quiet period on firms gearing up for an IPO. Consequently, it is possible to analyze the effect of analyst reports around the IPO date on stock returns using the Korean data. This study investigates the short-term and long-term returns of firms which analysts cover from the time of their IPOs compared to those that did not, among the newly listed firms on the Korea Stock Exchange during the period from 2010 to 2020. This research empirically examines whether the release of analysts’ reports for IPO firms play a role of providing useful information or playing a role of hype. We find that newly listed firms in the KOSPI (Korean Composite Stock Price Index) with analysts’ coverage tend to earn lower initial returns. And there is no significant relation between analyst coverage and initial returns for newly listed firms in the KOSDAQ (Korea Securities Dealers Automated Quotation). Furthermore, the release of analyst reports is also positively related to one-year excess returns over the industry benchmark. The results suggest that analyst coverage for IPO firms in the Korean stock market play positive roles of improving market efficiency by delivering useful information to market participants and reducing information asymmetry.

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