Most principal-agent literature has focused on how to control inefficiency caused by the information asymmetry. This article also addresses the control issue with regard to the compensation structure on how a board of directors as a principal could achieve an effective internal control over the CEO as an agent. Due to the unavol dable information asymmetry on the investment size between the board of directors and the CEO, the CEO is able to exploit the rents and use them as bribe not only to entrench himself but also to exploit more rents in the future. In the game theoretic model , the CEO chooses investment level , the second man decides to launch a palace coup or not, and the board of directors determines the pay gap between the CEO and the second man respectively. In equilibrium, the CEO chooses the optimal (or non optimal) investment for the shareholders when the pay gap between the CEO and the second man is larger (smaller) than that of the exploited rents. To our surprise, the second man’s equilibrium strategy ends up with no oalace coup regardless of whether the pay gap is larger than rents or not. In addition, the more able a CEO is, the larger the pay gap will be. Therefore , in equilibrium the board of directors could contr이 the CEO’s incentive by making the palace coup threat credible with the large pay gap. This article provides a new perspective on the role of the increased pay gap as an outcome of effective internal control, rather than an outcome of internal control failure

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This paper presents a pricing formulas of the defaultable bond under the reduced-form model. The market value of the firm ’s asset, as the first state variable, is assumed to follow the jump-diffusion process which reflects the sudden changes of the firm value, and to exhibit a mean reverting. A new probability measure, “default risk adjusted forward measure", is defined and used to price the FRN. This new measure has a strong advantage of calculating interest rate derivatives with the default risk. The model is also extended to price the defaultable bond with the counterparty default risk.

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Using a large sample of rights offerings by firms belonging to top 30 Korean business groups (chaebols) during the 1987-1999 period, we examine tunneling/propping effects within affiliated firms , We find that the announcement return of rights offerings by a poorly performing chaebol-affiliated firm is significant and positive and that its return is significantly and negatively related to the abnormal return for the value-weighted portfolio of other non-issuing firms in the same group. These findings support the tunneling view for chaebols In contrast, other cases show significant and positive return relations between issuing firms and non-issuing firms in the same group, supporting the propping view for chaebols. Taken together, our results suggest that there is propping alongside tunneling within chaebols.

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This paper compares long-run buy-and-h이 d returns of privatization initial public offerings to those of domestic stock markets of respective countries using a sample of 204 privatization initial public offerings from 37 countries. The evidence indicates that the privatization IPOs significantly outperform their domestic stock markets. However. there are substantial variations in the long-run performance of privatization IPOs across industries. issuing countries. and offer size. In addition to comparing privatization IPO returns to the market return. the time serial determinants of long-run buy-and-h이 d returns of privatization shares are analyzed. The results indicate that the long-run performance of privatization IPOs is closely related to the proxies of policy uncertainty. consistent with the signaling models of Perotti (1995) and Biais and Perotti (1997)

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Due to capital market imperfections, external financing is more expensive than internal financing and the effects of internal fund availability on investment outlay is greater for financially constrained firms. Consistent with this notion, most empirical research on financing constraints finds evidence that firms facing a higher gap between the internal and external cost of funds exhibit larger investment-cash flow sensitivities Despite such evidence, however, there are still conflicting views on the caUSeS of the sensitivities and on their cross-sectional differences. For example, Fazzari , Hubbard, and Petersen (FHP, 1988) find evidence that more financially constrained firms show higher investment-cash flow sensitivities whereas Kaplan and Zingales (1997) find just the opposite evidence using a subset of FHP's data. Kaplan and Zingales argue that these sensitivities are not a useful measure of financing constraints as claimed by FHP In this study, we take into consideration managerial conservatism in external financing in addition to the cost gap between internal and external financing caused by asymmetric information. While we measure the investment-cash flow sensitivity employing the con ventional panel data model , we carefully classify firms according to the degrees of asymmetric information and/or managerial conservatism, applying both univariate and multivariate classification methods. Using Korean firms. eight-Year panel data in the period of 1990 to 1997, we find evidence that managerial conservatism is a more important factor than asymmetric information in explaining the cross-sectional differences of the sensitivities Furthermore, conservative firms show significantly larger sensitivities than aggressive firms.

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This paper develops a new family of models of generalized autoregressive heteroskedasticity (GARCH). The family captures the asymmetry in volatility based on a non-parametric method, namely spline method. Specifically, this paper proposes cubic and quadratic Spline-GARCH models. These models extend the partially non-parametric (PNP) GARCH model of Engle and Ng (1993) , which is based on piecewise linear functions. This paper also introduces cubic and quadratic Spline-EGARCH models which are generalized versions of Nelson(1991)’s exponential GARCH model. Due to the non-parametric nature of the proposed models, they are free from mis-specification problems which most of existing parametric models may suffer from. Using daily KOSPI return data for the period from January 1990 to June 2000, we find that the proposed models perform better in terms of likelihood values than other existing models including PNP GARCH model and Hentschel (1995) ’s model, and that the quadratic Spline GARCH model , among proposed models, is the most parsimonious in capturing the asymmetric volatility in the data. The empirical examinations of the news impact curve also reveal that the existing parametric models over-estimate the volatility generated from extreme shocks and that they fail to incorporate so-called 'threshold effect' of a large positive shock. Further empirical investigation of the new models in risk management and out-of sample performance would be of considerable interest.

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The purpose of this paper is to test the unbiased forward rate hypothesis (UFH) in the Won/Dollar foreign exchange markets during the period before and after the Korean financial crisis. We attempt to reconcile some conflicting results regarding the Won/D이 lar UFH by testing a diverse set of models such as the change rate model (CRM), the error correction model (ECM) , the GARCH-in-mean CRM, the GARCH-in-mean ECM, and the rolling sample regression model. The major results can be summarized five-f이 d. First, both the Won/Dollar spot and forward rates f이 low a non-stationary process with a unit root. Second, there exists a c이 ntegrating relationship between the Won/Dollar spot and forward markets, implying that two exchange rates share a common long-run swing, Third , the UFH is rejected under the formulation of the CRM and the ECM. Fourth, the test results are highly sensitive to the choice of sample period. It turned out that the Korean financial crisis at the end of 1997 made a significant contribution to a shift in the structural relationship between the Won/Dollar spot and forward markets. Fourth, the evidence from the GARCH-in-mean models indicates that there exists time-varying risk premium in the Won/Dollar exchange markets. Therefore, the existence of time-varying risk premium, especially significant after the crisis, can be regarded as one of major factors against the UFH in the Won/Dollar markets

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This study investigates stock market integration and downside risk among several stock markets such as Korean stock market, US stock market and Japanese stock market. This paper is visualizing stock market integration via time-varying correlation derived from bivariate GARCH model. The GJR extension of bivariate GARCH model is used to examine whethet increase or decrease in US stock return has an asymmetric impact on Korean stock market volatilitι According to the empirical findings of this paper, both stock market integration between Korea and US and the stock market integration between Korea and Japan are increasing rapidly after the Korea currency crisis of 1997, but the evidence of downside risk is not strong. Also finding is that the balance of foreign fund inflow in Korean capital market is one of the most important factor in stock market integration.

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Korean financial industry are experiencing rapid environmental changes since Asian financial crisis in late 90’s. Such environmental changes caused an increase of the need for measuring corporate credit risk or default probability Corporate default prediction is not a new theme and many prediction methods have been developed. So far, almost all of the methods are based on accounting informations or qualitative analysis of experts. So, the accuracy of the prediction can be affected by the transparency and the update timing of the accounting informations or the subjectivity of the experts. Recently, to overcome such limits of those prediction methods, some new models which are using investors’ expectations in financial markets are suggested. One of them is the EDF (expected default frequency) model , in which stocks are considered as a call option In this paper, we suggest an EDF model for Korean listed companies and examine whether the EDF model is useful in predicting corporate default in Korea, empirically. And we compare prediction results of the EDF model with other default prediction models The results of empirical tests in this paper show the EDF model is useful in predicting corporate default and in monitoring credit risk changes. And the results of the comparison with other models show that the EDF model provides more powerful and accurate predictive information on corporate default than other prediction models

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We present a competitive rational expectations equilibrium model to explain the closed-end fund puzzle, where the price of the closed-end mutual fund deviates from the net asset value of the fund. We show that the closed-end fund puzzle can be explained as an equilibrium phenomenon which arises from an institutional feature of the fund when the fund manager has private information. In the equilibrium of the model , information asymmetry still remains and, therefore, the closed-end fund is not a redundant asset to the uninformed investors The price of the fund deviates from the net asset value by a value of information, which is determined by the quality of the information, the investment strategy of the fund, and a liquidiry shock.

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