‘Build-Transfer-Operate(BTO)', one variation of project financing, has been widely used to finance the infrastructure projects. To induce private participation in the infrastructure projects with low (or even negative) rate of returns, BTO arrangements were supplemented with ‘minimum rate of return guarantee' by the government. This ‘BTO with minimum rate of return guarantee' caused much economic inefficiencies-overestimation of the demands and resulting waste of tax money-due to the perverse incentives inherent in the arrangements. This paper analyzes the BTO arrangement using simple economic models and suggests some measures to mitigates the inefficiencies.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

Determining the spread (or the premium) of CDS (Credit Default Swap)s properly is the first step for making the domestic credit derivatives market work. However, as far as we know, there is no literature dealing with won-denominated CDS. We suggest two methods for determining a won-denominated CDS spread and then we analyse the spreads obtained by each method. One method uses the market quotes of dollar-denominated CDS, whose reference entities are dollar-denominated bonds issued by domestic firms. The other method uses the credit spreads of won-denominated risky bonds. In addition, unobservable asset correlation is a critical factor in determining the spreads of basket default swap or a single CDS with counterparty default risk. Hence, we also suggest calculation methods for both implied correlation and historical correlation, and analyse the derived correlation results. Our results are remarkable. First, we can't find any evidence of a long-term equilibrium relationship and price-discovery phenomenon between won-denominated CDS spreads obtained by the two different methods. Second, won-denominated CDS spreads calculated by the first method are shown to be subject to the implied volatility of KOSPI200 options and KOSPI200 returns. However, the spreads calculated by the second method are shown to be subject to the treasury bond yields and the spreads between long-term bond yields and short-term bond yields. Third, the correlation implied by the dollar-denominated basket CDS is quite different from the historical correlation. In fact, the implied correlation is much higher than the historical correlation for basket CDS whose protection seller is a domestic financial institution and protection buyer is a foreign investment bank. Fourth, the historical correlation calculated by using CDS spread data is higher than that calculated by stock return data. The spreads of basket CDSs or a single CDS with counterparty default risk has a negative relationship with asset correlation. Therefore, the CDS spreads using stock returns correlation are higher than those using default swap spread correlation.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

The market for Equity Linked Deposits (ELD) has been rapidly growing in Korea. Most ELDs can be decomposed into two components；straight bond and equity option. The latter is the more important part of the two because it primarily determines the characteristics of an ELD, which are quite different from those of a plain deposit product. The diversity of equity options in ELDs make it difficult for investors to evaluate the value of ELDs. This paper examines pricing models for ELDs based on data on ELDs issued from Mar. 2003 to Dec. 2005. The option features in ELDs covered in this study include exotic options like Barrier and Digital options as well as plain vanilla European options. We restrict our attention to products of which underlying assets are Korean equities or equity index. We calculate theoretical prices of ELDs in the primary market and compare them with issue prices to determine which pricing model is suitable for pricing ELDs. For the valuation of options embedded in ELDs, we use both historical and implied volatility estimates and assume stochastic or constant interest rates to see the influence of interest rate assumptions. Under each option pricing assumption, theoretical prices of ELDs are on average below issue prices. The interest rate assumptions have little effect on the price while the implied volatility model is better than the historical one in explaining issue price of ELDs. Also some factors driving the discrepancies between theoretic and issue price are identified. They include type of implicit derivatives, underlying asset, and so on.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

The paper investigates financial characteristics of bank mergers and acquisitions (M&A) in the U.S. banking industry, employing the data for U.S. banks when M&A activities in the industry were booming in the late 1990s. It is interesting, but not surprising, to find several new attributes that relate to M&A, given the dynamically changing environment of the U.S. banking industry in the studied period, especially in the areas of technology and deregulation. This study found that acquiring banks were, overall, larger in their size and market-to-book value ratio than other groups of banks, i.e. the acquired and nonmerging banks. Acquired banks were generally less efficient in operation, compared with independent banks, and were, to a degree larger than chance would suggest, a type of bank holding company (BHC). Furthermore, the variables, size and (operating) efficiency, showed intertemporal stability between the two sample periods.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

Using a single intertemporal consumption allocation model, we derive the user cost of owner-occupied housing and show a unified, internally consistent approach to incorporate the user cost in the Diewert-superlative index numbers such as the Divisia price index, which may be called as the True Cost of Living Index (TCLI). Since the user cost contains the expected rate of capital gains, we formulate an adaptive- extrapolative expectation model to estimate and forecast the expected series quarter by quarter. In an application to Korea, our user-cost evaluated index numbers exhibit wider inflation rate fluctuations than the Consumer Price Index (CPI), reflecting monetary policy implemented under the auspices of the International Monetary Fund and the World Bank during the 1997 foreign exchange crisis. Therefore, for a country like Korea where house prices are subject to great inflation, it is more critical to make a concerted effort to compile the necessary data and to construct the TCLI, such as the Divisia price index, with our user cost concept rather than to simply rely on the fixed-weight CPI including an ad hoc measure of owner-occupied housing without theory.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

We develop an event study methodology which can be referred to the value-based event study analysis (hereafter called as “VESA”). This study is fundamentally based on the seminal works of Miller and Modigliani (1958, 1961, 1963). It is noteworthy that the valuation models can be used to estimate the intrinsic value of the firm, and some financial events may have impacts on the firm value changes. So if we can find that the firms experienced with some financial events have changed the intrinsic values, it is natural to say that the financial events incur the changes. In VESA approach, the intrinsic firm values will be measured by the intrinsic Q values (hereafter called as “IQ”).The following empirical findings about the long-term effects of M&A events are based on the VESA approach.First, in post-M&A samples, we find that the IQ values are lowered in the short-run, but in the long-run the IQ values are turned around to increase.Second, in the comparison of pre-M&A and post-M&A samples, we find the changes in IQ values in the short-run are not statistically significant, but they are significant in the long-run.In sum, the short-term effects are in line with the existing M&As literature, of which are mostly based on the traditional returns-based event study approach. The findings of long-term effects are unique in this paper.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

This paper presents empirical evidence that the intraday pattern of cumulative depth and spread in the limit order book explains the price discovery process of limit order trading. Using unique data covering 339 stocks listed on the Korea Stock Exchange during the sample period from June 2000 to December 2003, we estimate intraday ‘information share’ of quotes suggested by Hasbrouck(1995), which is based on Vector Error Correction Model. We find that information share of best quotes is concentrated at opening of trading and then declines, which resembles a ‘reversed J-shaped pattern.’ In contrast, contributions of the higher-step quotes (steps 2 to 10) to price discovery process increase slowly and then are stabilized in the afternoon. Our results suggest that informed traders seem to submit limit orders strategically, discriminating between best quotes and other higher-step quotes in the limit order book within trading day. We also find that the contribution of best quotes to price discovery process is positively associated with spread but negatively associated with cumulative depth. This relationship suggests that informed traders concentrate on limit orders at best quotes for small stocks and in a period when information asymmetry is high. Price discovery of best quotes tends to be transmitted to the higher-step quotes for large stock in the later part of a trading day, in which market is deep. In general, the price discovery process is strongly related to the liquidity formation process within a trading day.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

The purpose of this research is to examine the effect of bundling and information spillover from the KOSDAQ primary and secondary markets on the IPO pricing process. Particularly, this study explores how the bundling and information spillover affect the determination of the final offer price and underpricing of KOSDAQ IPOs. Results indicate that the information spillover and bundling from the primary and secondary marekts indeed decrease the marketing and information production expenditures of the IPO by increasing the final offer price and thereby reduding underpricing. This research also examines the effect of information spillover and bundling on the IPO pricing in the case of pioneering IPO firms. The empirical result suggests that pioneering IPO firms tend to have lower offer price and larger underpricing than their followers. This confirms the existence of the effect of bundling and information spillover from the KOSDAQ primary and secondary markets. The findings are consistent with issuers implicitly bundling offerings to achieve more equitable internalization of information production costs and thereby preventing coordination failures in the primary IPO market.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

This paper investigates trading performance and strategy of each investor type in Korean Treasury Bond(KTB) futures market. The empirical results are as follows. First, foreign investors and banks take the top two ranks in cumulative profits. Investment trust companies and securities companies are the worst two performers. Second, from the point of daily trading, futures companies, individual investors and foreign investors are counter-trend traders while banks, investment trust companies and securities companies are trend followers. But from the point of intraday trading, individual investors and foreign investors are trend followers while futures companies, banks, investment trust companies and securities companies are counter-trend traders. Third, futures companies, individual investors and foreign investors have advantage in forecasting next day's volume weighted average price(VWAP) compared to other investor types. But this relative advantage is exploited only by foreign investors in real trading situation. Based on the empirical results, we can infer trading patterns of each investor type as follows. First, banks, futures companies and individual investors have accumulated profits by intraday short term trading. Second, although foreign investors take position at unfavorable prices during intraday level, they make profit by daily position trading based on counter-trend strategy. Third, insurance companies incur cumulative loss due to forecasting error in VWAP. These findings suggest that futures companies and banks have a short-lived informational advantage and foreign investors are better at long-term position trading in KTB futures market. What the results of this study imply is consistent with Dvorak(2005).

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

This paper investigates whether outside directors enhance the firm value through improved corporate governance in Korea. Firstly, the paper examines the determinants of the size of outside directors in the board of directors. The outside directors were introduced not by the voluntary corporate participation but by the law to improve the corporate governance system in Korea. Therefore, firms are not active in appointing outside directors in their board and seem to satisfy only the minimum criteria stipulated by the law. Specifically, the outside director ratio, the excess outside director dummy and the excess outside director ratio all decrease as the board size and the firm profitability increase.7) As for the control variables, bigger firms and firms with director liability insurance seem to appoint outside directors more actively. However, big firms with the asset size of 2 trillion won or greater have smaller excess outside director ratios. It seems to be caused by the larger legal minimum of outside directors for these firms. The main empirical results show that the outside directors do not have any impact on the firm value. After controlling for other variables that may affect the firm value, we show that the outside director ratio, the excess outside director dummy, and the excess outside director ratio do not have any influence on the value of the firm. As for the size of the board of directors our spline regression result shows that it has a positive relationship with the firm value for the firms with the small board. But for firms with bigger board size there seems to be no relationship between the firm value and the board size. We also performed the subsample analysis based on whether the firm has the outside director candidate nomination committee, whether there are resigning outside directors, and whether there are outside directors serving more than one term, and whether there are foreign outside directors. The results show that these aspects have no influence on firm value except the case of foreign outside directors. The ratio of absence at the board meeting has also little to do with the firm value. Conclusively, the outside director system is a relatively new in Korea and it does not seem to be utilized actively by the firms so far.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel