In this study we study the conflict of interests (COI) among customers of financial investment services companies (or securities firms) that operate diverse businesses in Korea as well as between the firms and their customers. Financial firms, in general, engage in diverse business activities with different customers, and each of business process has potential for COI between counter parties. For example, when a financial firm engages in a transaction with a customer, it gains valuable information about the client. Then, the possibility of COI arises because the firm has incentives to exploit the information to reap any kind of profit, perhaps to win additional deals for itself or a third party at that person’s expense. The root cause of a COI is the fact that a financial firm usually acts as an agent, and capitalizes from information asymmetry, often inherent in the firm’s transactions with individual customers. In this sense, financial investment services companies in Korea are appropriate subjects for this study for their diverse business areas for a wide array of customers, in which COI is very likely to emerge during their operations. In fact, some studies have been conducted on the COI in universal banking transactions at Korean financial investments services companies (securities firms). Those studies include Park and Shin (2007), Park, Choi, and Lee (2011). However, in general those institutions that provide universal banking services (e.g. securities firms in Korea) establish chinese walls to prevent the COI with another businesses. This creates difficulty in accessing data for COI cases. Another challenge is that many studies in this topic have produced conflicting results. In Lin and McNichls (1998), Kim and Choi (2008) and other related studies, they argue that affiliated analysts have the potential of COI. Cowen, Groysberg, and Healy (2006) and Park and Youn (2009), in contrast, insist that a possibility of that COI is lower due to maintaining their own reputation. As such, to increase objectivity of our study we select the most fundamental businesses of a financial investment services company: research analysis and underwriting. Then, we try to identify the COI in these core businesses. Specifically, we conduct an empirical analysis to verify the existence of COI in the Korean financial investment services companies, in this paper securities firms, focusing on measuring any possibility for biases that get involved in research analysis. The results of the study are as follows. First, it confirmed that analysts in Korean financial investment services companies (securities firms) working for an IPO underwriter tend to release less positive earnings outlooks and they had high accuracy in forecast. But our study results also indicate a possibility that COI in the industry could have stemmed from informational asymmetry among some analysts, resulting in their reporting not as accurately as it could otherwise be. These analysts, as opposed to third party analysts, tend to publish earnings forecasts that include smaller forecast errors and are less positive, while, nonetheless, are less accurate on the whole. Second, the same is also true among the most trusted financial analysts with solid reputations for being regarded as thorough and reliable in their reporting. The empirical analysis is made based on the assumption that an analyst’s opinion is influenced primarily by the characteristics of the financial investment services company where the analyst is working. In Korea financial investment services companies exert significant influence on their research function, and this seems to cause a COI. In other words, analysts reported more frequently if their securities firms had more brokerage business market share. That evidence was more clear when their securities firms had industrial affiliates. And in the middle-sized securities firm, their analysts reported more frequently if their securities firm had more investment banking business market share. Third, we found that the affiliated analysts could raise the COI by selecting more positive long-term IPO firms when their securities firm were affiliated with bank and asset management firms. Despite the recent move toward strengthening regulation in the financial sector, the frequent outbreaks of COI cases, within both domestic and foreign financial firms, reinforces the need for a stronger legal and institutional foundation to more effectively address the problem. Hopefully, the outcomes of this study will contribute to further improvement of financial investment services companies in their standards of work ethics in Korea, which will then raise the competitiveness of Korea’s financial industry as a whole. As domestic capital market grows and concentration and diversification of securities firms accelerate, accordingly, we conclude that strengthening the firewall among businesses of securities firms is imperative for the improvement of their competency and the prevention of investors' losses due to the COI.

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The global banking industry has undergone a wave of mergers over the last two decades and, as a result of which, mega banks have arisen in many countries around the world including Korea. Korean banks respond to this recent trend of bank consolidation by lowering the deposit interest rate and raising the loan interest rate (Park, 2004). Another major change had taken place even before the megabank trend. After the government allowed financial intermediation services by non-bank financial institutions in the late 1990s, commercial banks had started to reduce making loans to individual consumers since the monitoring costs are relatively higher than the interest income. As a result, banks have become more conservative in making loans to borrowers with low credit. In contrast to banks that strictly adhere to credit evaluation models, investors of online P2P (Peer-to-Peer) lending use much more flexible methods to judge borrowers’ qualifications for a loan, which include ‘hard information factors,’ ‘social interaction factors,’ and ‘soft information factors.’ Naturally, borrowers with low credit ratings use online P2P lending as one of the available funding sources. In this paper, we explore factors of success in online P2P lending repayment. In particular, this study examines how each of these three most common factors- ‘hard information factors’, ‘social interaction factors’, and ‘soft information factors’-- affect the loan repayment. This paper uses data from 542 loans from a leading crowd funding company in Korea from June 2008 through November 2010. We use a number of questions and answers, pre-poll results, and a number of attempts for making loans as the proxy variables of social interaction factors. Unlike foreign online P2P lending, Korea’s internet lending takes place through the social relationship between borrowers and investors, formed by communicating via the online bulletin board. We obtained the following empirical results. Firstly, borrowers’ personal bankruptcy experience has a significantly positive impact on the success of loan repayment. This is because borrowers with experience in personal bankruptcy have an incentive to improve their credit ratings through sincere loan repayment because a typical online P2P lending system uses a savings bank account as an escrow account. Therefore, they can improve their credit ratings for loans from commercial or savings banks by maintaining good credit standing online. These results imply that people with poor credit can use online P2P lending not only for raising money but also for improving their credit quality. Secondly, the purposes of loans for housing, living, and medical expenses have a significantly positive relationship with the success of loan repayment. This means that if they get loans for essential living expenses, they would exert greater efforts to repay the loans. Thirdly, debtors, who actively share personal information and interact with lenders online through P2P auction site message boards, are more likely to repay their loans than borrowers who have less social interaction. It appears that lenders can get more access to borrowers’ personal information and thus effectively monitor their loans. Borrowers can also establish trust with lenders and make a stronger effort to repay loans. The implications of our analysis are summarized as follows: Firstly, although earlier studies on personal loans have focused on personal bankruptcy decisions, this paper examines the effects of individual peculiarities on loan repayment. In particular, we find that bankrupt borrowers make greater efforts to repay the loans through online P2P lending. This is because if borrowers repay their loans in time, they can improve their overall credit ratings for loans from commercial banks in the future. Therefore, policy makers can consider online P2P lending as one of policy tools to encourage financial consumers with low credits for credit recovery. Secondly, we show that borrowers who raise money for essential living expenses make stronger efforts to repay their loans. Thirdly, we find that close interaction between potential borrowers and lenders is an important success factor in loan repayment. We conclude that such interaction can help reduce the information asymmetry, establish trust between borrowers and lenders, and raise the possibility of loan repayment. Our paper also has an important policy implication for consumer banking and small and medium enterprise finance. Domestic online P2P lending intermediaries work in partnership with savings banks and use their bank accounts as escrow accounts. However, due to the recent insolvencies of a number of large project finance operations, many savings banks are unable to play the roles of online P2P lending firms’ escrow accounts. For example, ‘Pop Funding’, one of the biggest online P2P lending intermediaries in Korea, had been in partnership with ‘Jeil Savings Bank’. But this bank was forced to shut down the operation because of its insolvency. Therefore, in order to firmly establish online P2P lending as a way to provide financing and credit enhancement for low credit borrowers, commercial banks should also play the role of providing escrow accounts for online P2P lending companies. In fact, European banks have recently been trying to enter the online P2P lending market more aggressively.

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This study analyzes potential economic effects the supply chain finance (SCF) framework may have on subcontract transactions using theoretical modeling and numerical analysis. The outcome of this study is expected to shed further light on more effective ways in which the supply chain finance (SCF) can be introduced in the market. This attempt aligns with the partnership with and shared growth between large and mid-sized companies, in the formation of a “win-win” market environment. Recently, the opportunity to optimize the financial flow in the whole supply chain processes between financial institutions and business enterprises has increased as most of the commercial transactions are being done through electronic system. This directly links the business flow externally to subcontractors and the like; the flow is no longer limited within the enterprise. This means that the number of targets to be optimized in the supply chain management (SCM) has exponentially increased. Accordingly, such extensive and complicated business ecosystem raises the impact supply chain finance (SCF) has on the businesses. Despite such rapid growth in electronic business transactions, the alternative payment method including electronic account receivables are rather limited. Although there have been some policy efforts to vitalize the electronic transactions, the channels are reserved to, for instance, buying companies and dealings with the companies’ tier 1 subcontractors whose credit ratings are relatively high. This evidently creates problems. For one thing, those subcontractors that belong to tier 2 or below in supply chain still very much at disadvantage in the current framework. When they have to liquidate their account receivables, they are but to choose between high discounted prices or an underground money market. On the other hand, more than 70% of the account receivables issued to tier 1 subcontractors are held up to maturity in the banking sector. To resolve this unfair practice, we propose a “win-win payment” system in subcontract transactions to mitigate difficulties faced by small and medium size companies. The system basically extends the reverse factoring mechanism for the sub-tier 1 enterprises. By granting credit supports to those smaller subcontractors, the system helps to decrease the cost of capital and create new incentive structures for suppliers to improve their quality. By so doing, the buyers can also expect to increase their sales and profits from the operation. This approach stands out from the previous studies that have mainly focused on the optimization of cost of capital at the level of the entire supply chain. We think that our approach better reflects the reality in view of the present domestic affairs. According to our analysis, the buying companies have an incentive to induce the suppliers to improve their quality by offering credits to the whole supply chain with the win-win spirit. With the expectation to raise the efficiency in supply chain management, they can also extend the deadlines of account payables, thereby increasing the expected profits as a result. However, we have verified that the system we had proposed operates only in the case in which the credit spread between buying and supplying companies exceeds a threshold. This may explain why the current system, a kind of reverse factoring with recourse only in two firms, is not working well between a buyer and its tier 1 subcontractors. We have also found that, in general, more credit is provided to the supplier whose quality has relatively higher impact on the market demand, which ultimately generates more expected profits. Further, we have proved that the business profits are maximized when the credit is offered to the tier 2 companies when the quality of tier 2 subcontractors has a decisive effect on the cost of the tier 1 firms. By adopting the new payment system, supplying companies are able to strengthen their financial solvency through decreasing the capital cost and holding period of the account receivables. And business continuity with the buyer can be stronger because of their quality improvement. Meanwhile, as for the financial institutions, they also have an incentive to participate the win-win payment system. They can acquire new customers without taking additional risks, often embedded in cross selling and lending. Ultimately, the benefit of the new system can be shared by all as the probability of fallouts in subcontract transactions can be reduced. Consequently, this can further strengthen the national economy as more tax revenues can be expected from commercial bills, which are to be curbed from the discounted underground market into the official banking sector. To make this system work, of course, a set of supportive policies from the government is required. For instance, various tax benefits and credit guarantees can be offered to the buying and supplying companies as rewards to adopting the new payment system in their business transactions. To induce the financial institutions to create more financial products to promote the system, the government can subsidize the expenses for the account receivable insurance. In addition, the watchdog’s thorough monitoring against buyers’ moral hazard is needed to ensure that the suppliers are free from the right of recourse.

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Korea Housing Finance Corporation (KHFC) introduced conforming mortgage loan (CML), which is standardized to be compatible with securitization. It is similar to the conforming loan in the U.S. The U.S. government is directly and indirectly involved in the home mortgage market. Its direct involvement is through the granting of Federal Housing Administration (FHA) loans, as well as loans granted by the Department of Veterans Affairs (VA) and the Rural Housing Service of the Department of Agriculture. The government’ indirect involvement is made possible through the securitization. The mortgage loans offered by private firms, on the other hand, are referred to as conventional mortgage loans. Some conventional mortgage loans have to conform to the requirements in order to be purchased by the Fannie Mae and the Freddie Mac. Most of these conforming loans are securitized by those public entities. By buying mortgage loans, these two governmentsponsored enterprises (GSEs) create liquidity for lenders, freeing up capital so they can make more loans, thereby offering better support to the credit market. The access to funding from the capital markets on fairly generous terms by Fannie Mae and Freddie Mac has historically generated a steady demand for conforming loans, and in the process allowed lenders to offer somewhat more favorable terms on these home mortgages. In many respects, CML in Korea and the conforming loan in the U.S. are quite similar. For instance, the private mortgage loans that satisfy the requirements set by KHFC are purchased by the corporation. CML also allows lenders to provide home mortgage loans on very favorable terms. KHFC requires the following specific conditions for CML. Borrowers should have credit grades no worse than 8th grade assigned by the certified credit bureaus. Loan-to-value and debt-to-income ratios should not violate the guidelines set by Korea’s financial watchdog, called the Financial Services Commission. Also, the loan size cannot exceed 500 million Korean Won, and the length of maturity ranges from five to thirty-five years. Both fixed and floating rate loans are accepted. In addition, there is no restriction on repayment method, and even bullet loans are qualified for CML. As soon as it was introduced in March 2012, due to these borrower-friendly terms, CML became instantly popular in the Korean residential mortgage loan market. Mainly its low interest rate and flexible repayment scheme attracted many. The low interest rate relies predominantly on the risk mitigation measure provided by KHFC since CMLs are sold by commercial banks with the presumption that they would be securitized through the issuance of MBS with credit guarantee by KHFC that is again backed by the government. The government guarantee of CMLs can be understood as a necessary incentive to induce mortgage borrowers to switch their existing loans to long-term fixed rate loans with amortization from short-term bullet loans. And yet, CML has some structural flaws that require immediate policy attention. Contrary to initial intention, bullet loans still comprise a significant portion of CML portfolio. In addition, the credit standard is set at a very low level in terms of the borrowers’ credit scores and repayment ability. Moreover, servicing companies are free to set their own level of servicing fees, which create ample chances for disputes to erupt between servicers and borrowers in anytime soon. These problems may result in significant financial burden on KHFC when they are entangled with the problem of information asymmetry prevalent in the mortgage market. In response to these potential challenges, we make the following four policy recommendations. First of all, bullet loans should be completely eliminated from CML portfolio. Second, credit standards should be significantly tightened immediately. Third, KHFC should restructure the loan management system to reclaim the right to determine the level of servicing fees lenders can charge. Finally, transparency on CML should be enhanced through disclosure of wider range of information and tighter monitoring by the financial supervisor and the National Assembly. According to the news reports in early 2013, a policy measure was taken to impose a ceiling on the amount of CML each bank can sell. Banks seemed to have responded to the measure by raising the loan interest rates. If the banks chose to increase the loan interest rate, one possible outcome is adverse selection. Safer borrowers whose risk levels fall within the given risk bracket may be unwilling to borrow at a higher interest rate than what their credit standing; as a result, the mix of borrowers within the pool becomes riskier. The second possibility is that an increase in the loan interest rate could worsen the likelihood for moral hazard problem. That is, those borrowers within the pool who have some latitude in their investment decisions may choose riskier projects at a higher loan interest rate. If the banks are exposed to the default risks, they will not raise the loan interest rates, because higher interest rates could mean lower expected profit for the banks. Since the banks are not responsible for the defaults, they are willing to raise the rates. Therefore, the quantity restriction should be avoided since it can only aggravate either adverse selection or moral hazard or both problems by those banks.

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The purpose of this paper is to estimate the causal effects of the new growth funds (NGF) for Small and Medium Business Corporations (SBC) on the financial performances of the beneficiary SMEs. The recent studies by Kim (2005), KIPA (2006), KIET (2007), KSBI (2009) presented a series of evaluations on how public loans for SMEs had performed. They basically compared the beneficiary SMEs and the non-beneficiary SMEs to evaluate the effects of the public loan program. However, those studies showed many limitations. First, they failed to account for the heterogeneity of the SMEs by failing to reflect unobserved dimensions such as the management capability of CEOs. Even with a proper set of control variables, the beneficiary SMEs could be quite different from the nonbeneficiary SMEs. Second, the data used in the studies is limited to that of the SMEs whose financial data were readily available. This can be problematic as the sample selection based upon only survival can incur inconsistent policy effect because the survivor SMEs are more likely to be better performing ones. In short, the previous estimates carry the survival bias. Especially, if the survival rate of the beneficiary SMEs is significantly different from that of the non-beneficiary SMEs, the inconsistency problem can be further aggravated. As an alternative identification strategy, we narrowed down the scope of our data to the SMEs which had previously applied for the NGF but were excluded from a control group. As mentioned, the previous studies used the non-beneficiary SMEs as a control group. However, the beneficiary SMEs are different from the non-beneficiary SMEs in the areas that are unobserved as well as observed. The observed differentials can be controlled for in a parametric empirical specification. The unobserved heterogeniety is, however, still prevalent, and we need to take a different strategy to better identify it. To do so, we included in our samples only those SMEs which had applied for the same public loan program, that is the NGF. Evidently, some applicants were approved and some were rejected after a pre-announced screening process. We used the rejected SMEs as a control group. Because they were viewed as an under-performing group by the SBC standard, the estimated effect must be in favor of the beneficiary SMEs. That is, the comparison group should playa a key role in lowering the boundary for the NGF effects. If the estimated policy effect was indeed in favor of the control group, then we can conclude that the treated SMEs had performed poorly and that the NGF did not serve the purpose of the program. Furthermore, we explicitly took into consideration the survival of the SMEs in order to minimize the survival bias, which is chronic in this line of literature. The data showed that the average financial performances of the beneficiary SMEs were worse than that of the rejected SMEs if we ignore the survival patterns of the SMEs. The reason is that the NGF tends to extenuate the lives of the marginal SMEs whose performances were poor while the rejected SMEs ended up filing for bankruptcies after the rejection, leaving only the fittest among the rejected SMEs to survive. As a result, the average performance of the rejected SMEs turned out to be better than that of the approved SMEs. The survival bias might cause an underestimation of the policy effect. To further minimize the selection bias, we benchmarked the concept of Heckman’s two-stage estimation which uses the control function approach. In sum, in order to accurately evaluate the policy effect of the NGF of SBC we developed the difference-indifferences estimation by explicitly considering the survivals of SMEs. For our empirical analysis, we used a set of administrative data to reduce the measurement errors. Specifically, the data pool is comprised of the longitudinal data on the public loan information for the NGF and the financial data from the Korean Enterprise Data (KED) over the period of 2002 through 2009. We primarily focused on the financial ratios as outcome variables, representing profitability (return on asset and return on equity), growth (growth of sales and growth of operation profit), and stability (debt ratio and own-capital ratio). The following three empirical analyses were implemented. First, we calculated the simple difference-in-differences estimates without any covariates. Second, we estimated the usual difference-in-differences estimated while controlling for the observed characteristics of the SMEs. Third, we additionally controlled for the possibility of survival in the short or medium term. We presented the estimation results for the purpose of comparison. The empirical results show the following three interesting facts. First, we found a noticeable level of survival bias. Thus, without properly handling the survival bias of the SMEs, we are likely to end up with the policy effect biased downward. Second, the profitability and stability of the beneficiary SMEs turned out to be improved by the NGF even though the statistical significance depends upon models and measurements. Lastly, the NGF tended to prolong the lives of the beneficiary SMEs to a statistical significance margin.

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One of problems in Korean housing loan markets is that most of the maturities of housing loans are so short that often borrowers are exposed to risks following the frequent changes in the volatile domestic housing markets and financial environments on the whole. Since year 2011, accordingly, the Korean government has made some policy initiatives to encourage the conversion of some portions of existing short-term housing loans into long-term mortgages. As mortgage back securities (hereafter MBS) are the financing resources for long-term mortgages, the MBS market should be developed to succeed in that policy. The objectives of this paper are to study the current problems and constraints in the MBS market and then suggest the policy implications for advancing the MBS market. This study stressed that, for the development of MBS market without pausing any threat to the financial market stabilization, two things should be taken into consideration in implementing the policy. First, the credit qualities of MBS’ underlying assets should be kept at certain level risk. Second, the government should control the aggregate liquidity to prevent the MBS from leading to the oversupply of housing loans. Considering the investors’ general attitudes and capabilities, the potential demand for MBS is not expected to be sufficient to match the increasing supply of MBS. According to our estimation, the outstanding amount of MBS will be 68 Trillion Won on the condition that the 30% of banks’ housing loans will be converted to the long-term mortgages at the end of year 2016, while the investors including insurance companies and public and private pension funds will have the capacity of holding only up to 55 Trillion Won. Therefore, the demand for MBS is likely to fall behind its increased supply. This paper, accordingly, reviewed several ways in which the demand for MBS can be raised under a number of possible scenarios. According to our scenario tests, the most doable way to increase the demand for MBS is to somehow improve the investors’ risk attitude toward MBS so that the investors will be more willing to hold greater portions of MBS in their assets. As the insufficient demand for MBS may make it more difficult to restructure the housing loan markets, the government also needs to devise a scheme to further boost the MBS market. This study suggested two measures to expand the demand for MBS. First, the liquidity of MBS should be enhanced to attract more investors. This can be achieved mainly in two ways: one way is to adopt the ‘fungible issue scheme’ for MBS, and the other is to simplify its tranches. Here, by the fungible issue, we mean that issuers supply the bonds with the same coupons and maturity dates within some period even if the issue dates are different. The scheme is to make investors regard those bonds as the same types of bonds. On the other hand, among tranches of MBS issued by KHFC, the seven-year maturity tranche is least liquid. We, therefore, suggest that the seven-year maturities are to be replaced by more of five-and ten-year tranches. Second, the government can set in place policy initiatives to increase transparency by wider scope of disclosure on the information of MBS. This will help increase the demand for MBS in the long run because improved transparency can certainly strengthen the investors’ confidence in the credit quality of MBS. Currently, as the information of each underlying asset of MBS is scarcely disclosed to investors, they evaluate the credit risk of MBS based not on the assessment of the qualities of underlying assets but on the guarantee of KHFC. As the investors currently set investment limits on MBS in line with the size of guarantor’s capital, it is necessary to forge an environment in which the investors can begin to rely more on underlying asset qualities, independently of the issuers. It is evident that the restructuring of housing loans from short-term lending to long-term mortgages has limited efficacy as a solution to the current problem of housing loans. While the policy may alleviate the vulnerability of housing loan markets to liquidity shock by diversifying the maturities of housing loans, it cannot alone solve the insolvency of housing loan borrowers, especially that of lowest income households. Therefore, the restructuring of housing loans should apply to only the borrowers who have the capability of solvency. This is because if the insolvent borrowers get the long-term mortgages, it will only increase credit risk in the financial market, further exacerbating its stability. In addition, financial policy alone are not sufficient to solve the aggravation of household credit risk and the insolvency of some household loans. More coordinated policies with other sectors such as employment and social welfare policies may significantly increase the chance of success. Though the financial aids may offer transient solution to some household borrowers’ shortage of liquidity, in the longer term, it can only add more burden on them as more aid means more amount to pay back in the future. Also housing loan problems stem from layers of issues surrounding Korea’s household loan markets. To start with, the household asset composition is heavily concentrated on real estates. Also, banks are reluctant to issue non-collateral loans, and the bankruptcy system has to be further advanced to meet the challenges of current financial market. Therefore, the restructuring scheme of housing loans can only make the limited contribution to solving the housing loan problems. However, the restructuring scheme is important because it will ease the current liquidity problem caused by the concentration on maturities of housing loans. As a result, the policy will be effective measures to prevent the housing loan problems from having a spillover effect on real economic sectors, causing economic crisis.

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In the small-and-medium-enterprise (SME) financing market, due to asymmetric information to which those smaller companies fall victims, the market failure frequently occurs. Accordingly, this paper raises two salient questions: one is on the credit discrimination that exists in the Korean SME financing market and the other is on whether the current financing supply is good enough to ensure the sustainable operation and growth of SMEs. Before answering these questions, we overview the practical and theoretical basis concerning the concepts and its categorization of the funding gap for SMEs. We also look into the SME financing policies and the effects they have on both in domestic and international context. With respect to the funding gap concepts, there are mainly two approaches (Cressy, 2002): positive and normative definitions. Positive definition argues that the funding gap is an equilibrium of an imperfect market, in which lending volume is below the level that would emerge in a perfect market. Normative definition argues that it is a market failure, for which appropriate policy response should be an increase in lending volume. However, this concept classification does not make any difference to the conclusion of this paper. We also introduce another categorization of the debt funding gap(Equinox Management Consultants, 2002): the size gap, the risk gap, the flexibility gap, and the knowledge gap. A size gap asserts that, for the small-and-medium sized firms, the demanded amounts of the debt funding are usually too small to be of interest to the institutional lenders such as large banks. A risk gap entails that lenders do not necessarily price loans solely based on potential risks. Rather, they reject loan applications if estimated risk exceeds a pre-specified cut-off rate or particular standards or if the available collateral is not sufficient. A flexibility gap postulates that according to some SME owners, financial institutions do not provide flexible terms and conditions tailored to their specific loan demands. Finally, a knowledge gap claims that the financial institutions do not understand knowledge-based businesses. We analyze the determinants of the turn down ratio of ‘Small & Medium Business Corporation of Korea’ loan applications, using the logit model. We use the loan application data which also contains some firm characteristic information including who applies for the ‘Small & Medium Business Corporation of Korea’lending and records of guarantee projects between 1999 and 2011. The logit regression outcomes show that the coefficients of the credit-related variables and most of the discrimination-related control variables are statistically significant. In particular, the shorter firm age leads to the higher rejection rate, but start-up companies have relatively lower rate of rejection. Depending on the model specification, the firm location and the age of CEO have some effects on the result; metropolitan companies and those with younger CEOs show relatively higher turn-down ratios. As for the female CEO dummy variables, we did not find any statistical significance. We argue that these empirical results should not be interpreted as the credit discrimination evidences for the Korean small-and-medium sized firms. Instead, these results could reflect the characteristics of the ‘Small and Medium Business Corporation of Korea’ policies. We estimate the size and proportion of the funding gap caused by the company's growth for the Korean SMEs which are mandated to be externally audited. In this paper, we use the model of Canovi and Venturelli (2008), which predict SMEs’ latent funding demand on the basis of growth speed. The firm’s growth speed is proxied by its sales growth rate, which in turn drives its financial debt demand. The funding gap reflects this difference that exists between the estimated financial debt funding demands and the real supplies of the financial debt. Our methods consider long-term growth driven funding demand while excluding the one-time capital-investment-driven funding demand. In addition, the estimated parameters are very sensitive with the cross-section and the time-series observations. Therefore, we averaged out each individual firm’s parameter estimates across the whole periods. We hope that future researches can resolve these limitations of our methods. We divided our pool of samples into 12 groups according to their asset sizes and industry classifications. The results show that about 70% of the companies considered in the sample is estimated to be lack of funds. For these fund-seeking companies, the group median values of the funding gap lie between 5% and 12% of the asset size. And these funding gap ratios are higher for the large asset groups and the electronic and IT (information and technology) industry group than those of the rest. These results seem to suggest that the firm size and the industry are critical factors that require serious consideration when devising a supporting policy for SMEs.

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This paper aims to explore a common practice in which a bank designs an optimal double-layered debt contract through the means of controlling a lending rate and a deposit rate. For this study, I modify a monopolistic version of the Monti-Kelin model interpreted by Freixas and Rochet (2008). Positioned between depositors and borrowers, the bank takes into account the likelihood of a borrower exercising his or her limited liability in case of a negative income shock. On the other hand, the bank could also exercise its own limited liability against depositors if necessary. Thus, anticipating the consequences of dually limited liability, the bank specifies the conditions of loan and deposit contracts. In this regard, this paper contributes to the existing literature in that it explains endogenous determinations of credit ceiling and capital buffer of the two debt contracts a bank is involved in. It examines how the contracts can vary (asymmetrically) throughout a business cycle jointly with the deposit and the lending rates. A major result from the model is that a lending rate for a fully collateralized loan as well as a deposit rate for an unsecured loan may exhibit asymmetric and even adverse responses to the counter-cyclical policy rate adjustments. Furthermore, in the presence of capital regulation, it is deduced that the countercyclical interest rate policy may amplify the pro-cyclicality of bank lending.

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This study analyzes the factors which affect the underwriting contracts between firms and investment banks under two situations with different levels of information asymmetry, overnight block trades and new equity issues. This study focuses on the opportunistic behavior investment banks show while executing these contracts to analyze how the firm and investment bank affect the offer (sale) price. Previous studies conducted on opportunistic behavior of investment banks in possession of superior information on capital markets have focused mostly on its effects on pricing of initial or new equity issues, while not enough analysis has been conducted on investment banks’ opportunistic behavior and their respective effects on pricing which differ by type of underwriting contracts. Therefore, we have chosen to look into overnight block trades and new equity issues to differentiate the information asymmetry in which investment banks pursue their opportunistic behavior. In cases with high information asymmetry, that is overnight block trade, investment banks do not necessarily behave in line with sellers’ expectations. Rather, they are much more inclined to take advantage of the situation to maximize their share of the profits even by placing the sellers’ best interests at stake. When information asymmetry is low, that is the case with new equity issues, however, investment banks more readily act in line with the sellers’ expectations, regardless to the type of underwriting contract. In selection of investment banks, firms need to first decide whether to deal with one or multiple underwriting investment banks and whether they should sign a contract based on best efforts or firm commitment. From the perspective of investment banks, as part of their effort to maximize profits, they must also take into consideration their relationships with the sellers as well as the investors. In the case of overnight block trades, in which information asymmetry is high, investment banks show ample opportunistic behavior because it is relatively difficult for the firms to monitor investment banks’ activities. It is likely that investment banks, even when they receive a higher fee for additional risk taken in firm commitment contracts, will sell the shares at whichever price they can get from the market. In other words, the level of discount and underpricing is similar for each type of contract, which is against the anticipation of sellers who expect higher deal certainty and low discount level from firm commitment contracts than best efforts ones. However, from investment banks’ perspective, their main interest is to raise fees and reap the best economic benefits they can while lowering their underwriting risk, which inhibit them from putting in much effort to lower discount rates. Thus, for the best interest of the sellers, if the pricing is similar between the two types of contracts, it would prove to be more economic for them to pursue a best efforts contract. In the case of new equity issues with relatively low information asymmetry, investment banks are much more constrained from pursuing opportunistic behavior. Consequently, they prone to act less opportunistically by focusing more on meeting the expectations of the principal, regardless to whether the contract is best efforts or firm commitment. For example, for shareholder placement new equity issues, the majority of shareholders prefer firm commitment contracts as a way to maximize deal certainty and low pricing to minimize acquisition cost. For investment banks, a firm commitment contract is also a suitable as a way to secure their relationships with the sellers for future business opportunities while pursuing to lower pricing to minimize their underwriting risk. In such cases, the optimal alignment of interest between the principal and the investment bank takes place. Our findings from this study are as follows. Firstly, in the case of new equity issues, the level of discount and underpricing tends to increase for firm commitment contracts compared to that of best efforts contracts. This is due to the low level of information asymmetry in new equity issues, allowing investment banks to focus more on minimizing their underwriting risks rather than on showing opportunistic behavior to maximize profit. In the case of overnight block trades, however, the level of discount and underpricing is not dependent on the form of contract. This is due to the high level of information asymmetry involved in the course of overnight block trades, enticing investment banks to commit opportunistic behavior by executing transactions at any possible price even when it is against the interest of the sellers. Secondly, we find that in the case of overnight block trades, the level of discount tends to decrease as more investment banks are involved as bookrunners. This is due to the competition amongst investment banks in their common interest to maintain a positive business relationship with the sellers in the future. Thirdly, we find that in the case of overnight block trades, firms prefer firm commitment contracts with investment banks when the volatility of the firm’s stock price is high. On the other hand, in the case of new equity issues, firms prefer firm commitment contracts with investment banks when they have a stronger bargaining power over investment banks.

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Previous studies on risk management, particularly on the relationship between hedging activity and firm value, have used derivatives tradings as a proxy variable for hedging. Yet, the results from theses tudies have shown some inconsistency, weakening the argument that such type of activity as a form of risk management can actually boost firm value. To the best of our knowledge, Zou (2010) is the first paper of such kind that examines the impact of hedging activity on firm value; in particular, it analyses a property-liability insurance as a firm’s hedging activity in light of risk management. Using a unique set of property-liability insurance data from China, Zou (2010) examines whether propertyliability insurance can enhance firm value. Zou is one of very few in this line of research thus far. Such lack of research on the effect of hedging, especially using property-liability insurance, on firm value can be best explained by the limitation of data availability on firms’insurance in the U.S. and Europe. In China, on the other hand, for the past decade, one of the interesting developments in the global economy is the liberalization of China’s insurance market. Despite much change in the industry, many Chinese insurance companies still do not take fully into account the level of risk exposure in setting insurance prices (Zou, Adams, and Buckle, 2003). In other words, insurance premiums paid by firms in China don’t reflect the level of hedged risk. Evidently, this calls for more compilation of different sets of data from global firms to further reinforce the hedging effect of insurance on firm value. Therefore, this paper applies Zou (2010)’s model to a sample of Korea’s publicly listed non-financial firms. Unlike the case in China, Korean insurance companies determine the insurance prices mainly based on the firms’ level of risk exposure, there by fully reflecting the level of hedged risk of each firm they insure. It is reasonable to expect that, therefore, using a sample of property-liability insurance from Korea will provide accurate and reliable results in examining the hedging effect on firm value. In measuring the effects of hedging activity on firm value, this study uses Pooled OLS, Fama and MacBeth (1973) cross-sectional regression, and fixed effects panel regression. In all three regression models, Tobin’s Q as a proxy variable for firm value has a positive and statistically significant relationship with the level of property-liability insurance use. This result indicates that firms with more insurance use for hedging activity have higher firm value. This study also adopts the instrumental variable approach to address the endogeneity of insurance purchase. This result is consistent with the findings of three previous estimation methods. Based on the pooled OLS result, the average hedging premium is estimated at about 2.68%. This average hedging premium is much higher than the one reported in Zou (2010), which is about 1.47%. This study also runs regression models, considering the lag effects since the insurance use in current year as well as in previous year can affect firm value. As expected, firm value in current year has a positive and statistically significant relationship with the level of insurance use in previous year. This paper also tests whether financially constrained firms have a higher average hedging premium. Several studies (e.g., Froot, Scharfstein, and Stein, 1993; Smith and Stulz, 1985; Stulz, 1996; Ross, 1997; Leland, 1998) have argued that as firms reduce the variability of future cash flow through their risk management strategy, they can overcome their financial constraints and consequently enhance their firm value. Assuming the validity of these arguments, we can expect that financially constrained firms have higher value premiums associated with hedging than financially unconstrained ones do. In our paper, as a proxy variable for internal financial constraints, we use a dividend dummy variable (e.g., 1=if a firm pays dividends less than median firm does; 0=otherwise) and a firm size dummy variable (e.g., 1=if a firm size is less than median one; 0 =otherwise) for external financial constraints. We then run regression models with these dummy variables. As expected, we find that financially restricted firms have a higher value premium associated with hedging than financially unrestricted ones. Therefore, our finding contributes to the risk management literature in providing clear-cut direct evidence that hedging activity via property-liability insurance can enhance firm value. In addition, this study tests whether firms with large investment expenditures have higher average hedging premium than ones with small investment expenditures. According to several studies (e.g., Froot, Scharfstein, and Stein, 1993; Stulz, 1996; Ross, 1997), firms can reduce their taxes and overcome an under investment problem through the hedging activities. In this paper, we use a capital expenditure dummy (e.g., 1=if a firm’s capital expenditures are more than median firm does; 0=otherwise) as a proxyvariable for firms with large capital expenditures and a R&D and advertising spending dummy variable(e.g.,1=if a firm’s R&D and advertising spending are more than median firm does; 0=otherwise) for firms with large R&D and advertising spending and then run regression models with these dummy variables. According to the results, a firm with large expenditures has a higher value premium associated with hedging than one with small expenditures. Our paper contributes to research in risk management by providing richer empirical evidence and practical application of risk management theories. This paper ultimately aims to narrow the gap in findings between theoretical and empirical researches.

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