Since the introduction of the Act of Financial Investment Services and Capital Markets in 2009, the fund markets in Korea have enormously grown. In this study, we examine three salient composites: fund style, performance persistency, and market timing ability of fund managers. To this end we use all equity funds survived during the period of 2001 through 2009 (all 139 funds). In addition, we look into the relation between the persistency of fund style and the fund performance. We also study how the fund performance has been changed since the financial crisis in 2007. To classify fund styles and examine fund performance, we use a return-based style analysis as in Sharpe (1992). The return-based style analysis sort funds according to the magnitude of the coefficient estimates. Unlike Sharpe who uses simply a regression model comprised of several indexes, we use the Fama-French (1993) five-factor model composed of three equity factors and two bond market factors. The equity factors are the market factor and two factors related to size and book-to-market, namely SMB and HML, respectively; the bond market factors are term spread and default spread. The spread in yields between 5-year Korean Treasury Bonds (KTB) and 91-day Certificate of Deposit (CD) is used as term spread, and the spread in yields between BBB3-rated and AA3-rated corporate bonds is used as default spread. The reason we select the Fama-French 3 factor model to analyze equity funds in Korea is that, as recently reported by Kim, Kim, and Shin (2012), the Fama-French 3 factor model explains Korean stock returns best among many factor models considered. Our paper is the first paper that uses the bond market factors in analyzing equity mutual funds in Korea. Following Sharpe (1992), we classify fund style according to the estimated coefficients (or factor loadings) on each of the five factors. For example, if the magnitude of the factor loading of a fund on SMB is in the top (bottom) 30%, this fund is classified as small (large) fund. If the magnitude of the factor loading of a fund on HML is in the top (bottom) 30%, this fund is classified as value (growth) fund. If the magnitude of the factor loading of a fund on term spread is in the top (bottom) 30%, this fund is classified as business sensitive (insensitive) fund. If the magnitude of the factor loading of a fund on default spread is in the top (bottom) 30%, this fund is classified as high (low) credit risk fund. Of course, one fund can be classified into multiple funds. If the factor loading of a factor falls between top 30% and bottom 30%, this fund is not classified. The main results of this study are as follows: First, we confirm that the Fama-French 5-factor model shows the best goodness of fit and the lowest tracking errors for Korean equity mutual funds among many factor models considered, such as the Capital Asset Pricing Model (CAPM), the Fama-French (1993) three-factor model, and Carhart (1997) four-factor model. To compare the performance of the factor models, we estimated the models by observing the year-by-year rolling over for the three-year period for its monthly returns. We also find that the two bond factors are important for better understanding the performance of Korean mutual funds. In particular, since fund performance is affected by business cycles, the use of the bond factors would be essential in analyzing fund performance. Further, the bond factors are good proxies for business cycle. In fact, we confirm that mutual funds returns in Korea are significantly positively correlated with the Korea business-leading indicator and are sensitive to business cycles, which are also determined by the same indicator. Another important finding is that large and growth funds, rather than small, value funds, perform better and take more fund inflows in Korea. Also, Korean mutual fund managers tend to build their investment strategies toward value, large, business cycle-and creditsensitive fund styles. Fourth, only fund managers of a fraction of mutual funds show significant selection ability while most fund managers rarely show market timing ability. For some fund managers equipped with market timing ability, their market timing ability tends to be higher during the recent financial crisis (2007~2009) than during the other times. To analyze the market timing ability of fund managers, we use the conditional model on macroeconomic variables by following Ferson and Schadt (1996) to adjust for time-varying of the factor loadings. Fifth, while only a fraction of mutual funds show positive abnormal returns, they are shown to last just briefly. Rather, low performance (i.e., negative abnormal returns) tends to be strongly persistent. These results are somewhat consistent with the performance of U.S. mutual funds. Among the funds showing positive abnormal returns, growth and large funds show stronger persistence of good performance than do value and small funds. This result implies that the persistency of fund style could be related to good fund performance. Finally, there also exists in Korea the smart money effect, indicating that investors have an ability to identify superior fund managers and invest accordingly; this attests to the fact that fund inflows improve fund performance. Our study indicates, however, that this effect lasts only for three years.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

Many corporate governance literatures emphasize the importance of outside directors’ monitoring role and their independence. Theoretically, board of directors performs crucial roles in modern corporations where ownership and management are separated. As fiduciaries of shareholders, outside directors monitor managers who may pursue their own interests. Hence, as an internal governance mechanism, the independence of outside directors is a crucial factor in determining the effectiveness of monitoring and disciplining the management. In spite of this theoretical background, previous empirical studies failed to show consistent evidences in support of the effect of outside directors. Perhaps the lack of consistency in proving an effect of outside directors on performance can be interpreted as an indication that they have failed to distinguish “independent” and “friendly” outside directors. If researchers do not correctly distinguish independent outside directors from those who are not, the effects of outside directors on firm value cannot be clearly discerned as positive effects of independent directors may get cancelled out by the potential negative effects of non-independent directors may have on the firm value on average. Unlike prior studies, this paper, using hand collected data on the independence of outside director, examines how independent or friendly outside directors affect firm value as the directors would engage in monitoring and supervising a firm’s management. For the empirical analysis, we classify outside directors as ‘friendly’ or ‘independent’ by more refined and strict definition of independence of outside directors. Using this data classified into independent or friendly outside directors, first, we test the effect of independent (or friendly) outside directors on firm value. And then, we test whether the effect of independent (or friendly) outside directors on firm value varies with firm characteristics. Through these tests, we hope to verify that the value of outside directors depends on their independence alone. That is to say, the purpose of this paper is to provide new empirical evidence of the effectiveness of outside directors by focusing on the value of their independence in job performance. Our main finding supports that independent outside directors have a significant and positive effect on firm value. But friendly outside directors have either negative or no influence on the firm value. This result implies that independent outside directors play a pivotal role in enhancing firm value. We also explore how the relationship between the board independence and firm characteristics affect firm value. For this test, we run regression analysis using the interaction terms between board independence and the firm characteristics. According to the results about the effect of independent outside directors on firm value depending on firm characteristics, the firms with a longer corporate history, the higher level of capital expenditure, advertisement expenses, selling and management cost, the competitiveness in the industry, free cash flow and possibility of agency problems has more positive valuation effect of board independence. In other words, the interaction terms between the ratio of the independent outside directors variable and some of firm characteristics variables are positive and statistically significant in some firms’ characteristics. However, given the ratio of friendly board members who have school or business ties with management or with the firm, firm value is lower when firms have the higher level of leverage, sales growth rate, volatility of equity returns, and ratio of fixed assets. In other words, the interaction terms between the ratio of friendly outside directors variable and some of firm characteristics variables are negative and statistically significant in some others firms’ characteristics. This result implies that independent outside directors are very important on firm value in Korea regardless of firm characteristics. And finally, to mitigate the endogeneity problem and to check robustness of our previous results, we conduct additional tests as follows: First, to check robustness of our previous results, we run regression analysis using the alternative definition for independent outside director. The results using new definition are consistent with our previous results. Second, to deal with endogeneity problem, we run regression analysis using the data which show the change of the ratio of independent outside directors in board composition. By this regression, we are able to capture the importance of independence of BOD directly. This method can mitigate the endogeneity problem that has hampered previous attempts to estimate the effect of board independence. The results are consistent with our previous results. Third, to address the endogeneity problem caused by reverse causality, we run reverse regression by changing explanatory variables with dependent variables. According to the result, tobin’s Q doesn’t affect the level of board independence. Consequently, we confirm that our result is robust. In short, our results imply that the effectiveness of the boards’ monitoring role depends on their independence and the independence of outside directors is important for enhancing firm value. All in all, this empirical evidence suggests that Korean listed companies should reinforce the independence of board of directors by appointing independent outside directors to improve the firm value and correct the current problems with outside director system. As shown, our study contributes to the literature by promoting enhanced understanding about the crucial effect the independence of outside board members have on improving firm value.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

We investigate how the short sales regulations temporarily enforced during the financial crisis of 2008 affected market liquidity and informativeness of short sales. In specific, we compare the effects of regulations on stocks with ELW/Futures to those on stocks without them to study the empirical implications of Diamond and Verrecchia (1987), which distinguish between short-restriction and short-prohibition. During the financial crisis of 2008, among others short sellers took a lot of blame for having caused the market confusion. Accordingly, in an attempt to appease the market uncertainty for the time being financial supervisory authorities in many countries adopted a reinforced regulatory step by temporarily prohibiting most short sales. Korea was no exception. On the 30th September, 2008, Financial Services Commission announced that the short sales of all listed stocks would be prohibited temporarily except for market making activities for ELW, ETF, individual stock Future/Option, and this provision went into effect on the 1st October, 2008. Because of these exceptions made in the prohibition of short sales, the regulatory change brought about different effects across stocks. Investors prohibited from short sales could replicate short position by trading a combination of derivatives, which were written on each stock. For instance, a speculative investor could buy put ELWs on stocks instead of shorting them directly. An ELW market-maker might sell this put ELWs and then hedge its risk by shorting the suitable amount of the underlying stocks. In other words, the stocks with derivatives were influenced by short-restriction, in which short-selling was sub-stantially possible, but the cost of short-selling increased. However, the stocks without derivatives were affected by short-prohibition, not short- restriction. Because it requires highly sophisticated expertise to implement synthetic positions with derivative trading strategy, the replications of short position are available to only informed investors. As a result, short-restriction selectively drives out uninformed traders much more than informed traders, potentially increasing the proportion of informed short sellers. However, short-prohibition eliminates short sales by informed and uninformed investors equally. This is the key difference in the effects of short-restriction from those of prohibition. On the theoretical basis, Diamond and Verrechia (1987) suggested that any changes in the short selling environment could influence the mix of informed and uninformed traders. Diamond and Verrecchia argued that as short-restriction and short-prohibition influence the composition of investors differently, the effects of short-restriction on market are different from those of prohibition. They predicted that short-restriction has stronger impacts on market liquidity and informativeness of short sales than short-prohibition does. To verify the claim, we analyzed the effects of short restriction and prohibition in the Korean market. We divide KOSPI200 index stocks into 58 stocks with ELW/Furtures, and 116 stocks without those, and compare the effects of short-restriction on market liquidity and informativeness of short sales to the effects of short-prohibition on those. We use trading data from 1st January, 2008 to 31th may, 2009 for our comparative analysis. To control for systematic differences between the two groups and to accurately identify the actual influences of regulations, we use a propensity score matching technique. Using market capitalization, trading won volume, turnover, and volatility, known as determinant factors for option listing, we obtain a propensity score for each stock with ELW/Futures and match it to two closest match stocks without ELW/Futures. The empirical results are as follows. Firstly, Amihud measure, R2 measure, and intraday quoted return volatility increased for all sample stocks during short sales regulations, and these changes were especially strong for stocks with ELW/Futures. The higher Amihud measure, R2 measure, and intraday returns volatility mean the lower market liquidity, market quality and market depth. So these results could be interpreted that the general market liquidity decreased during regulations, and market quality and market depth of stocks with ELW/Futures were more damaged. Secondly, the overall informativeness of short sales increased during short sales regulations, and the change was relatively larger for stocks with ELW/Futures than for those without. To examine the informativeness of short sales, we regressed each stock’ return on both contemporaneous and previous short selling volume. We found that coefficients of short selling volume grew stronger during the regulations and that the changes were more statistically and economically significant in those stocks with ELW/Futures. These results support Diamond and Verrecchia (1987)’s model that short-restriction has stronger impacts on market liquidity and informativeness of short sales than short-prohibition does, as short-restriction changes the composition of the remaining short-sellers. Our results are also consistent with those of Kolasinksi, Reed and Thornock (2010), which distinguishes outright prohibition and constraints by comparing stocks with listed options to stocks without in the US market. Thirdly, buyer order imbalances significantly increased, and relative bid-ask spread decreased during the short sales regulations. Limitation on non-holders’ selling activities during the regulations intensified buyer order imbalances, and forced up the trading prices over mid-quote prices, decreasing the relative bid-ask spread. Our research is the first one to empirically investigate the influences of short-sale regulations on market efficiency in the Korean stock market. Although short-sales regulations have been frequently used as emergency measures to stabilize stock markets to the outside shock, there has been no in-depth research conducted about the impacts of short sales regulations. We anticipate our research to contribute to designing short-sales institutions both academically and practically.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

This paper studies the profitability of the contrarian trading strategies in the Korean stock market in an attempt to provide some insights into why the trading strategies generate the abnormal profits. It has been reported in most foreign literature that the momentum strategies (i.e. buying stocks with high returns over the previous 3 to 12 months and selling stocks with poor returns over the same time period) earn significant profits for the following 3 to 12 months. Contrary to these empirical facts on foreign stock markets, many Korean academic papers reported that contrarian strategies (i.e. buying losers and selling winners) are significantly profitable in the Korean stock market. Yet no research effort has been made to explicate this strange phenomenon in the Korean market. The first objective of this paper, therefore, is to explain why this surprising phenomenon happened in Korea. Secondly we attempt to determine the sources of the expected profits of the trading strategies that use the past information. In contrast to the previous literature using the circumstantial evidence on the causes of the profitable trading, we directly look into the profits of the trading strategies as suggested by Lo and MacKinlay (1990) and Conrad and Kaul (1998). Adopting this approach we divide profits of trading strategies into two components: one that results from time-series predictability in security returns and the other component that arises due to cross-sectional variation in the mean returns of the securities contained in the portfolio. The significance of the time-series components (namely, overreaction and lead-lag effect) is interpreted to support the behavioral explanations on the trading profits, while significant cross-sectional variation in the mean returns indicates the risk-based explanations of the traditional asset pricing theory. We empirically show that contrarian strategies are able to generate profits only in the pre-crisis period. After the Asian crisis, momentum strategies earn significant profits just like in most foreign markets. At first, it may sound puzzling how the completely opposite strategies can remain significantly profitable in the consecutive periods in the same market. But these opposing outcomes in the Korean market do make sense if we consider the substantial structural changes which have taken place in the Korean investors’ behavior. It is suspected that the profitability of contrarian strategies in pre-crisis period is due to the dominant retail investors. For example, the individual investors traded more than 80 percent of the total amount in 1992. They are evidently inclined to buy cheap losers and sell high-priced winners, which leads to the profits of contrarian trading. Ever since the Korean market was opened to foreign investors in the aftermath of the 1997 crisis, the foreign investors and domestic institutional investors have quickly dominated the stock market trading. Their share of the trading amount jumped to 35 percent in 2005 and more than 45 percent in 2008. The dominance of institutional investors is suspected to be the main reason for the profitable momentum strategies. These explanations are also supported by Khil, Kim, and Sohn(2006), who report that the institutional investors and foreign investors show the positive feedback trading behavior while retail investors are chasing the negative feedback trading behavior in the Korean market. For the robustness check on the J-T strategies, we also test the profitability of contrarian trading strategy using the weighted trading approach. The trading strategy in Jegadeesh and Titman (1993) uses the stocks in the lowest past return decile and in the highest return decile to form the winners and losers. But in the weighted trading strategies, every stock in the sample is traded, with their weight measured relatively to the average return of all stocks. In the whole sample period, the weighted strategy does not generate significant profits. But the contrarian weighted trading did create profits in the pre-crisis period and significant losses in the post-crisis period. This outcome supports the previous findings on the performance of the J-T contrarian strategy. The analysis of the sources of trading strategies’ profits found that the investors’ overreaction is a significant factor, implying that the behavioral biases of the traders account for most of the trading strategies’ profits. However, the cross-sectional difference of individual stocks’ mean returns (reflecting the risk of each stock) also contributes to the profitability of trading strategies. This risk-based explanation indicates that the profit-generating trading strategies are compatible with the traditional asset pricing theory. The significance of both over-reaction and risk-based differentials in the Korean market implies that the profitability of trading strategies does not support or deny the behavioral or rational investment theories. If the former factor is larger than the latter, then the momentum strategies will generate profits, while if the over-reaction dominates, then the contrarian profits will be found significant. These results show that trading strategies’ profits can not be explained by either behavioral theory or traditional risk-return theory alone but by both of them. This conclusion is in line with that of Daniel, Hirshleifer and Subrahmanyam (2001), claiming that both investors’ irrational behavior and systematic risks determine the asset prices.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

This paper examines the IPO short-term performance by comparing the results before and after the abolition of the putback option provision. We used KOSDAQ market listed companies over the period between October 2003 and July 2010. In addition, we study the current IPO process by examining various relevant factors on public offering markets so as to shed further insight into regulatory implications on the IPO process. It has been well supported that the stock price in general increases after the initial listing or IPO. According to Ritter (1998), the stock price increases after the listing, which averages at approximately 18.8% compared to its offer price. Empirical studies in Korea also have reported similar results of the IPO underpricing (Kang, 1990; Lee et al., 1995; Choi, 1999; Lee and Cho, 2007; Byun and Cho, 2011; Lee and Nam, 2009). Previous studies on IPO have mainly focused on the positive stock price movements after the initial listing, suggesting the winner’s curse hypothesis, the market stabilization hypothesis, and/or the information asymmetry hypothesis, among others. In Korea, there was a temporary putback option provision from December 2000 to May 2007. During that period, underwriters had to buy back their IPO shares from investors if the stock price fell below a certain level (for example, 90%) of its offering price. Therefore, the underwriters had to be careful not to set the offer price too higher or higher than their bearable price level in order to avoid the investors’ putback option. However, after May 2007, the Korean regulator (the Financial Supervisory Service) abolished the putback option in line with the global policy direction toward the deregulation of the capital markets. The rationale behind that was to improve the efficiency of the IPO process by allowing more control to market participants. Perhaps out of coincidence with the abolition, however, the stock prices of IPO shares after the listing day seemed to have fallen significantly. Some market observers in the press have argued that the underwriters intentionally inflate offer prices because they are now free from the buy back obligation even in the case of significant price drops. In order to examine the validity of this argument, several empirical studies have been subsequently conducted to compare the initial price movements of IPO shares before and after the abolition of the putback option provision (Shin et al., 2004; Kim and Lee, 2006; Lee and Cho, 2007; Lee and Nam, 2009). However, those studies have limitations in testing whether underwriters have intentionally inflated offer prices. When the stock prices continue to decrease in short-term periods compare to the offer price, there can be two explanations for that phenomenon: underwriters either intentionally inflate the offer price or simply make inaccurate valuations on the IPO shares. Therefore, neither increase nor decrease in stock prices alone cannot adequately account for the behaviors of underwriters. This paper, therefore, uses the pre-IPO price from OTC market (the PSTOCK website) to calculate the average pre-listing price level of the IPO shares. We then analyze this pre-IPO price, the offering price, and the stock prices during the short-term periods (twenty trading days after the listing day) in order to determine whether the cause of the change was due to underwriters’intentional inflation of the offer price or simple error in determining the right level of the price. In short, our test hypotheses are as follows. First, after the abolition of the putback option provision, underwriters determine the offer prices more accurately, and the accurate valuation affects the IPO underpricing negatively. Second, since the regulation change, the ratio of subscription competition has been reduced, generating positive effects on the short-term performances. As the IPOs have positive effects on short-term performance, optimistic investors’ expectations have been built. Finally, the net sale behavior of institutional investors increases when putback option provision disappears, negatively affecting the short-term performance. We obtained the following results from the empirical analyses. First, IPO underpricing has been reduced after the abolition of the putback option provision as we expected. Our study results cannot find support for the accusation that investors manipulate the offer prices on purpose; the prices were actually low relative to the pre-IPO prices formed in the OTC market before the book-building process. Second, although optimistic investors’ expectations formed before the listing day have significantly positive effects on listing day performance, the expectations do not last beyond the first twenty trading days after the listing. Also, the results show that after trading begins, optimistic investors’ expectations formed after the listing day have a greater influence on short-term performance than pre-IPO investors’ expectations do. Lastly, since the abolition of the putback option provision, the net sale of institutional investors has significantly increased, negatively affecting the short-term performance. This study shows that the putback option has significantly positive effects on the stock price at the listing day and on the short-term performance. However, IPO underpricing still exists and there is no difference in accuracy of the offer price decisions among the underwriters. Therefore, we suggest that the IPO market regulations be revised to account for market autonomy and to help market participants make more careful decisions instead of regulating with more institutional devices to deepen underpricing.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

This paper examines the relationship between environmental management and firm value with a new empirical approach that can reduce the endogeneity problem observed in existing literatures. In the empirical analysis, we check the stock market response to the first announcement of the KRX SRI-ECO index with focus on the stock prices of those firms which are not included in this index. As the announcement is likely to be regarded as an unexpected event that may herald concerns among authorities and regulators, we expect that any stock price changes would be an independent reflection of investor’ perception on the relationship between environmental management and firm value. As a new initiative to strengthen the environmental management of Korean firms, the Korea Exchange has recently decided to introduce a new index, KRX SRI-ECO. The firms included in the index were chosen from the listed ones with strong environmental performance. The main purpose of the introduction of this new index is to raise stock investors’ awareness of environmental aspects of firms as potential performance factors while motivating them to improve their environmental management as a way to enhance their firm values. Since stock values of such firms do increase by being listed in the index, the announcement is expected to encourage other non-listed firms to raise their effort to improve their environmental management. Another advantage is that the development of new index can serve as a new information content in investment in stocks, effectively reminding the investors of the importance of environmental consideration. We conjecture that, given the new event, firms with poor environmental management would feel increased pressure to improve their current status so as to be qualified for the index with an ultimate aim to boost their stock prices. Then, we can expect that on the disclosure date of KRX SRI-ECO index, the level of environmental performance of firms is likely to have a negative relationship with the stock price of firms excluded from this index. Since this conjecture is fundamentally rooted in the assumption that investors do attribute value to the issues pertaining to environmental management, we can conclude that environmental performance has a positive effect on firm value. Above all, the methodology we use in our paper mitigates the endogeneity problem between environmental management and firm value observed in existing literatures. Existing literatures analyzing the relationship have shown that the improvement of the environmental management increases profitability and firm value, and contributes to the competitiveness (Hart and Ahuja, 1996; Klassen and McLaughlin, 1996). However, these researches invariably carry the endogeneity problem: they do not clearly establish whether the improvement in environmental management increases firm value or firms with already high value attain higher environmental performance (Kim, 2010). To minimize such problem, this paper analyzes the relationship between stock price response and the level of environmental performance subsequent to a policy change. Initiated by Lee and Park (2009), this research design has been further developed through a thorough analysis of the relationship between a non-target firm's stock price response and the level of corporate governance on the first target announcement date of corporate governance fund. In doing so, one of the key aims is to mitigate the endogeneity problem between corporate governance and firm value. Unlike the previous attempt, however, we try to further improve the approach by leaving out firms that are included in the KRX SRI-ECO index from our sample so as to more effectively minimize the noise effect due to firms expected of higher stock return for good environmental performance. Another prevailing criticism against existing papers on this topic has been that they would normally adopt arbitrary evaluation criteria for environment management. To correct this draw-back, this paper uses more reliable data, namely the environmental management evaluation score compiled by Korea Corporate Governance Service as a proxy for the level of environmental management of firms. Incorporating such officially accepted figures as those provided by this quasi-government organization, this paper further reinforces the result’s objectivity and reliability the data is also easily available to investors. In addition, we investigate which types of firms show stronger stock price responses vis-à-vis the new event. Empirically, we confirm that stock returns are higher for those firms with higher profitability or higher firm values since such firms can cope with the high opportunity cost of environmental management. At the same time, they are aware of the higher opportunity costs if they fail to effectively deal with the environmental management. Estimated results thus far are as follows: (1) Stock price response (CAR) of the firms excluded from the index around the disclosure date of KRX SRI-ECO index is significantly positive. (2) The environmental management score has a negative effect on the CAR. This result is consistent with our hypothesis that firms with poorer environment management history will react more to the new policy and pay more attention to their environmental management, which consequently elicits positive reaction from investors. This result also implies that the environmental management has a positive effect on firm value. On the other hand, among 5 sub-categories for the environmental management evaluation, environmental organization, environmental management, environmental performance, and activity of stakeholder have significantly negative effects on CAR. (3) When we divide the sample into two groups based on the average ROA in the past3 years and Tobin Q, and re-estimate the effect of environmental management evaluation scores on CAR in each sample, we find that firms with high profitability and firm value tend to show stronger significance.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

The sale of funds employing a dollar cost averaging strategy has allegedly started a new era in Korean fund market. In fact, Assets under management (AUMs) of equity funds have dramatically increased and investment patterns of individual investors have changed to indirect and long-term horizon investments since the dollar cost averaging funds settled down. Accordingly, investment management companies have also changed their trading strategies from frequent changes of holding stocks for higher short-term performance to buy and holding stocks, enabling them to timely react to market movement. In addition, securities companies and banks have been actively attracted to the dollar cost averaging funds, resulting in the changes of funds’ sale channel. This has profoundly influenced the overall financial industry. However, very little research has been conducted thus far on this issue in academy and practices. Most literatures have overlooked the effect of the dollar cost averaging funds on fund market, thus producing erroneous results. Since the onset of the structural changes in fund market in 2005 when the dollar cost averaging funds started to be sold in full scale, this paper benchmarks that year in examining selectivity skill and timing ability of equity fund managers during pre- and post-structural change periods. I conjecture that the investment companies are more likely to critically alter asset management strategies after the sale of the dollar cost averaging funds, which is supposed to have generated significant effects on the performance of fund managers. Therefore, I investigate the managers’ selectivity skills of purchasing (selling) appreciating (depreciating) stocks in advance and their timing ability to switch among fund asset classes in an attempt to profit from the changes in market outlook. In doing this, we use three performance estimation methodologies including combined models of Fama and French (1993) with Treynor and Mazuy (1966), Henriksson and Merton (1981), and Goetzmann, Ingersoll, and Ivkovic (2000). I also employ pooled regression for each year, non-parametric analysis, and dummy variable added regression for robustness test. The results of analyses using various methodologies to estimate performance show that the fund managers’ timing skills of fund managers strikingly improve after structural change in the fund market. For one thing, only 2% of equity funds are observed to hold statistically significant timing ability during the pre-structural change periods, while more than 30% of funds display timing ability during the post-structural change periods. I also provide evidence that fund managers present substantially different timing ability by investment management company, and that the timing skills of fund managers are much more improved after structural change in funds whose stock holding ratio is higher, total cost is lower, and size is larger (more than 100 billion won) or enormously tiny (less than 5 billion won). Meanwhile, the selectivity skills of fund managers deteriorate after structural change, but the extent of decline is not statistically significant. These results suggest that the investment companies may be able to compose holding stocks and to timely alter stocks by focusing more closely on the market movements especially those related to structural changes of fund market caused by the sale of dollar cost averaging funds. In reality, most dollar cost averaging funds are classified not as aggressive growth funds whose purpose is to achieve the highest capital gain accompanied by high share price volatility, but as value funds that primarily hold stocks that are conceived to be undervalued in price in the relatively long term horizon. This implies that trading strategy on equity funds is more likely to change the longer investment horizon and the lower turnover ratio, enlarging the opportunity of timing ability for fund managers. Another implication of the results of this study is that the impact of a rapidly growing fund market on the entire stock market has augmented since the sale of dollar cost averaging funds. Namely, as major liquidity providers, equity funds lead to entire stock market movement. For instance, the Korea Composite Stock Price Index (KOSPI) had increased for a while after the introduction of the dollar cost averaging funds, although foreign investors’ stock investments have reverted to a net selling position. This paper contributes to the existing literature in that the sale of dollar cost averaging funds bringing about tremendous structural changes is assessed as a crucial incident that marks the beginning of a new era in the Korean fund market. In addition, the paper minimizes the various biases caused by sample selection through more systematic selection procedure such as excluding master feed funds within family funds, picking one among multi- class funds, and including funds whose inception date is after June 2000 when new classification system of funds was introduced. Above all, this paper propounds salient implication that future researches associated with funds in Korean market should necessarily ponder over the impact of these structural changes on their results.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

The notion of liquidity is widely used in the finance area, such as in the studies of market microstructure and asset pricing. And yet, so many liquidity measures are available with little consensus on which measure is the most appropriate that it is difficult for researchers to decide which one they should adopt for their studies. In the US, Goyenko, Holden and Trzcinka (2009) provide a comprehensive study of liquidity measures. They run horseraces of the widely used proxies of liquidity, plus new proxies they developed against the high-frequency liquidity benchmarks. Lesmond (2005) investigates the liquidity measures of 23 emerging markets using the quarterly bid-ask spread as a benchmark. His study includes the Korean stock market; however, it has a limitation in that the high-frequency measure is not employed as liquidity benchmark. This paper compares various liquidity measures in the Korean stock market to provide a guide for the use of liquidity measures by employing the high-frequency data. The paper runs horseraces of low-frequency liquidity measures derived from daily data against high-frequency liquidity benchmarks from intraday data. At first, I classify the liquidity measures into two categories: spread and price impact measures. Spread measures gauge the direct trading cost while price impact measures the indirect trading cost. Liquidity measures used in the paper are as following: (1) High-frequency spread benchmarks: Quoted spread, Effective spread, Realized spread. (2) Low-frequency spread measures: Roll, Roll2, Gibbs, LOT, Zero, Zero2, Liu, Turnover, Amihud, Pastor and Stambaugh, Amivest, KRX quoted spread. (3) High-frequency price impact benchmarks: Lambda (λ), 5-Minute Price Impact, Static Price Impact. (4) Low-frequency price impact measures: Roll Impact, Roll2 Impact, Gibbs Impact, LOT Impact, Amihud, Pastor and Stambaugh, Amivest. Next, comparisons of liquidity measures are performed on the Korean stock market. The Korean sample is comprised of 271 firms listed in the Korea Exchange for the period from April 1993 to December 2004. Monthly and annual liquidity measures are estimated and compared by using two methodologies: correlation and prediction error analysis. The first correlation metric is the average cross-sectional correlation based on individual firms between the high-frequency benchmarks and the low-frequency liquidity measures. The second correlation metric is the time-series correlation based on an equally-weighted portfolio. The third correlation metric is the pooling correlation based on all month (year)-firm observations. As prediction error metric, the mean bias and the root mean squared error (RMSE) between the benchmark and the liquidity proxy are used. The results from the prediction error are expected to be useful for market efficiency and corporate finance tests, since in these fields the correctly scaled proxy is needed. This paper provides us with important findings about liquidity measures. First, in the comparison of spread measures, the KRX quoted spread, which uses the closing quoted bid-ask spread, has the highest correlations (0.397～0.977) and the smallest prediction errors (mean bias: 0.000～0.007, RMSE: 0.001～0.008) with the high-frequency spread benchmarks. However, this measure has different property with the other low-frequency spread measures because it adopts one observation among high-frequency data rather than proxies spread. Among the spread proxies, Amihud performs the best in correlation analysis (0.12 2～0.943), and LOT in prediction errors analysis (mean bias: -0.002～0.006, RMSE: 0.005～ 0.010). LOT shows the highest accuracy: in summary statistics, the mean of monthly LOT is about 0.8% when the mean of the Quoted and Effective spread is about 1.0%. Moreover, LOT has high time-series correlations with the benchmarks and performs well in the portfolios stratified by the firm size and effective spread. Second, in the comparison of price impact measures, most low-frequency measures, except Pastor and Stambaugh, have high correlation with high-frequency benchmarks. Gibbs Impact and Amihud perform distinguishably well. Pastor and Stambaugh is likely to contain much estimation errors when it is estimated based on individual firms. Also, two robustness checks are performed. First, the sample period is divided into eight sub-periods by using the market index moving averages. Second, comparisons are also done using firms included in the KOSPI200 index. These analyses show the similar results with the previous. The result of a sub-period for 1997. 6～1998. 6, in which Korea experienced the severe financial crisis, shows lower correlations and higher prediction errors than other sub-periods.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

The inquired disclosure is a system operated by the Korea Exchange (KRX) to validate the existence of material information when the price of a listed stock fluctuates substantially. It is different from other timely disclosure since KRX inquires information, and the firm confirms the information inquired by the Exchange whereas in case of other timely disclosure the firm itself mandatorily or voluntarily release information to the investors. According to the efficient market hypothesis, the stock prices react only to new fundamental information. Sometimes, the stock prices exhibit noticeable jump or plunge without any specific public information. In that case, the Exchange inquires of the firm about the reason for the noticeable price changes. In response to the inquiry from the Exchange, the firm usually provides two types of answers such as “nothing unusual” or “something undetermined.” This paper investigates how the demand for inquired disclosure from the Korea Exchange affects the movements of stock price and trading volume for the period of ±20 days surrounding the event. The event date is defined as the day when the Exchange demands the inquired disclosure related to the stock price jump or plunge occurring without any specific public information. Also, this paper investigates the trading patterns of different investors (classified as individual, institutional, and foreign investors) surrounding the day of inquiry. For this purpose this paper examines the cases of the KOSPI-listed firms which are inquired to be disclosed for the explanation of the jump or plunge of stock price for the period from 2005 to 2009. We collected a total of 497 samples which are composed of 436 cases of jump and 61 cases of plunge. Then these samples are divided into four groups depending on price changes and types of firms’ answers, such as jump/something undetermined, jump/nothing unusual, plunge/something undetermined, and plunge/nothing unusual. This paper employs typical event study methodology, and computes the abnormal return (AR) and the cumulative abnormal return (CAR) surrounding the event day using the market adjusted return model. The main results and implications drawn from the empirical analysis are as follows. First of all, we find insignificant abnormal return on the day of inquiry followed by stable price movements, suggesting that the demand for inquired disclosure from the Korea Exchange can play an effective role in calming down price jump or plunge. However, we do not find price reversals on the day of inquiry that are expected to exhibit if the past substantial price changes occurring without any specific public information were bubble. In addition, in case of something undetermined we observe 10-day CAR of -6% following the inquiry after plunge and +6% following the inquiry after jump whereas in case of nothing unusual insignificant price changes are observed following the day of inquiry. This result implies that in case of something undetermined stock price continues to reflect new information revealed in the market. Next, in the investigation of long-term stock price movements following the demand for inquired disclosure from the Exchange we find that in the case of plunge the stock prices tend to steadily increase following the day of inquiry. In particular, in case of plunge/nothing unusual the stock prices revert to the past level of stock prices. However, in the case of jump, we do not find any significant patterns of long-term price changes following the inquired disclosure. In this paper we also observe that the trading volume significantly increases during ±5 days surrounding the day of inquired disclosure. This finding suggests that investors are getting more sensitively responsive to the information of the demand for inquired disclosure from the Exchange. Finally, this paper investigates the trading patterns of three different types of investors classified as individuals, institutions, foreigners by observing the ratio of each investors' net buying (selling) position. We find that individual investors are the main driving force behind the stock price jump or plunge as net buyers while the institutions as net sellers. In particular, individual investors take net buying position on the day of inquiry and continue afterwards whereas institutional investors take net selling positions during that period only. On the other hand, foreign investors do not exhibit any notable trading patterns, suggesting that foreign investors do not respond to uncertain information in the Korean stock market. On the whole, this study is to contribute to the academic research in the area of market efficiency and informational effect. In particular, this paper can accelerate the studies on the informational effect of inquired disclosure in the Korean stock market. Also, the evidence of this research is expected to provide useful information to the investors in the stock market who frequently observe substantial price changes occurring without any specific public information. In addition, the empirical results of this study reveal important implication to the policy makers who are interested in the effectiveness of inquired disclosure system.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

In corporate finance literature it is well known that how a firm chooses its capital structure depends on its growth opportunity and profitability among many financial and economic variables. According to Fama and French (2002), both growth opportunity and profitability are the main reasons for financing deficits, and the capital structure decisions by firms are closely related to these two variables. There are many competing finance theories or hypotheses that try to explain the relationships between firm’s capital structure and financial and economic variables such as trade-off theory, agency theory, simple pecking order theory, complex pecking order theory, market timing theory and hold-up hypothesis. In this paper, we consider all of the above capital structure theories and hypotheses and test which theories or hypotheses are confirmed and which are not for Korean listed manufacturing companies. In particular, we examine how growth opportunity faced by Korean listed manufacturing firms may affect their choice of capital structure and which capital structure theory best explains financial decision making behaviors of Korean listed manufacturing firms. We extract our data using KISVALUE supplied by National Information and Credit Evaluation (NICE). The sample of our paper consists of 601 Korean manufacturing companies listed both on Korean Stock Exchange (KSE) and on Kosdaq from the period of 2000 to 2010. Based on the sample, we performed panel data analyses. The empirical implications are as follows: First, growth opportunity measured by market-to-book value ratio has a statistically significant positive relationship with book leverage, which is consistent with the simple pecking order theory. However, growth opportunity has a statistically significant negative relationship with market leverage, which is in line with the trade-off theory and/or the complex pecking order theory. According to Fama and French (2002), in the complex pecking order theory, firms are concerned with future as well as current financing costs. Balancing current and future costs, it is possible that firms with large growth opportunities maintain low-risk debt capacity to avoid either foregoing future investments or financing them with new risky securities. Second, we divide the sample into three groups according to the magnitude of their growth opportunity and find the same relationship for all groups as before, which is different from prior studies (Chen and Zhao, 2006; Serrasqueiro and Nunes, 2010), but that the highest growth opportunity firms are least sensitive to debt ratio compared to their lower growth opportunity peers. Moreover, our result seems to suggest that Korean listed manufacturing companies with the highest growth opportunity recognize their financial distress risk higher in the respect that they show low profitability compared to the firms of other countries. In general, it is more effective for the high growth opportunity firms to use more debt financing because they show high profitability and low borrowing cost on average. Third, the simple pecking order theory tested by financing deficit variable is not confirmed because the relationship between debt ratio and financing deficit is significantly positive only for the lowest growth opportunity firms (the other groups have significantly negative coefficients). Furthermore, the simple pecking order theory tested by profitability variable is confirmed because both market and book leverage shows significantly negative relations with profitability. The trade-off theory tested by asset tangibility and firm size variables is confirmed because both market and book leverage shows statistically significant positive relations with them. Also, the trade-off theory tested by bigshare dummy variable is confirmed because it shows a significantly negative relationship with debt ratio, which suggests that the higher the major shareholders’ ownership firms have, the lower the firms’ debt ratios are. Fourth, to test whether the market timing theory is confirmed for Korean listed manufacturing firms, we look at the relationship between debt ratio and external finance weighted average market-to-book ratio. The result depends on whether we use market leverage or book leverage as a dependent variable. We find a significantly positive relationship for book leverage and a significantly negative relationship for market leverage, which suggests that the market timing theory holds only for market leverage in case of Korean listed manufacturing firms. Finally, growth opportunity has a statistically significant negative relationship with bank loan, reinforcing the hold-up hypothesis which claims that firms with high growth opportunity are concerned that their firm-specific information may be monopolized and utilized by banks. According to the grouping analysis based on the magnitude of growth opportunity, the highest growth opportunity firms show a significantly negative relationship between growth opportunity and bank loan, but the lowest growth opportunity firms show a statistically insignificant relationship between them. This seems to suggest that the more growth opportunity firms have, the less preferable are bank loans for them.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel