Using data on Korean non-financial companies (NFCs) over the sample period from 2010-2019, we find that the traditional measure of corporate cash holdings underestimates their financial assets. Firms with lower cash flow tend to invest in risky financial assets, which is inconsistent with the precautionary motive of cash holdings. We further show that distressed firms facing operational difficulties invest more in risky financial assets in response to a decrease in operating profit or sales growth rate, or an increase in short-term financial liability. We argue that NFCs invest in risky securities in pursuit of yield to make up for their lower operating performance.

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This study analyzes the outsourced chief investment officer (OCIO) market using a multi-period, multi-dimensional auction model. The OCIO service is a type of consignment asset management system. Unlike a traditional consignment management system, however, the OCIO service can be characterized as a comprehensive wealth management service because the asset owner comprehensively delegates the rights to strategic asset allocation, which determines the proportion of investments in the core asset class, to the asset manager. Although the OCIO market initially developed in other countries, it has recently begun to attract attention in Korea, and the competition among managers is fierce. Managers and securities companies participate in the OCIO market as suppliers as fund-type retirement pensions are expected to be implemented, and, thus, private funds will likely emerge as the major consumers in the OCIO market. Korean OCIOs offer lower average fees compared to OCIOs in developed markets. This difference is due to the initial competition in the Korean OCIO market. Suppliers can offer lower management fees in the Korean market because even if they incur short-term losses, operating in the OCIO market will be profitable in the long run. The OCIO market is initially being evaluated as having high growth potential. As interest rates remain low, funds' demand for OCIO services to improve profits is increasing in the short term. Accordingly, the OCIO market has grown significantly, the ripple effect on the operating market is increasing, and interest in the OCIO market is rising. Because funds have less expertise in asset management than managers do, OCIO services may continue to be used to ensure high profits or stable management. The OCIO market is expected to grow, and, thus, management companies are competing to gain market share by offering low management fees. In addition, because the OCIO market is likely to take the form of a monopoly, a manager can benefit from taking over the OCIO market even if it incurs short-term losses. Because the OCIO service is a comprehensive asset management system, including strategic asset allocation, it is necessary to establish a separate OCIO system to provide efficient services. Accordingly, managers with experience in supplying these services may build OCIO systems more efficiently than those without experience can. Thus, the quality of OCIO services can be improved by enhancing intrinsic capabilities, such as by improving the system to manage assets according to a fund’s purpose. This difference suggests that the managers who previously provided OCIO services may be superior choices for future OCIO services. Accordingly, it is very likely that a few managers that are selected as OCIOs in the early stages and create efficient OCIO systems will monopolize the market. For these reasons, managers have an incentive to offer low management fees to capture the Korean OCIO market given the potential future profits. Thus, the competition among managers in the Korean OCIO market should be analyzed with a multi-period model. However, previous studies of the Korean OCIO market focus on the agency problem and analyze the market using only single-period models. Accordingly, this study constructs a multi-period, multi-dimensional auction model. We expand upon existing multi-dimensional procurement auction models by assuming that a manager’s efficiency and quality improve as the manager supplies OCIO services. This study analyzes the OCIO selection process using both a single-period, multi-dimensional model and a multi-period, multi-dimensional model, and we compare the results of both models. The equilibrium in the single-period model indicates that the more efficient the manager’s OCIO system is, the lower the optimal service quality is and the higher the optimal management fee is. Thus, the manager with the most efficient OCIO system is selected as the OCIO. The multi-period model also includes the assumption that efficiency improves after selecting an OCIO in the single-period model. We derive a dynamic equilibrium through dynamic optimization and confirm that a more efficient system is associated with a higher optimal service quality and a lower optimal fee, as in the single-period model. In both models, we find that a highly efficient company is selected as the OCIO. This result suggests that the OCIO market is highly likely to be oligopolistic. However, the optimal fee in the multi-period model is lower than that in the single-period model. This finding shows that when supplying OCIO services is expected to improve efficiency, price competition among managers may become overheated.

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This paper reviews recent studies on banking in Korea by classifying a substantial body of literature into three categories – the role of banks in the real economy, the efficiency and performance of the banking industry, and regulatory and policy issues. This paper differs from previous survey literature in that it offers a comprehensive systematic literature review of banking studies in Korea in a decade on from the global financial crisis and presents statistics of research articles on various topics in banking published in major economics and finance journals. We find the rising trend of banking research across all subjects, and in particular, dramatic increases around the global financial crisis. This paper also reveals a lack of studies on several topics such as distributed ledger technologies and central bank digital currency, recommending future research on these topics.

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This article reviews research conducted from 2011-2020 on the corporate governance of Korean firms. The purpose is to promote academic interest in Korean corporate governance research especially among non-Korean scholars and to provide guidance to young Korean scholars who are working in this area. We begin with the institutional features that are unique to Korea. We explain how they allowed researchers to develop interesting hypotheses that cannot be studied elsewhere, to establish causality that is not possible in other country settings, or to obtain data that are not available elsewhere. Then, we review the studies that examine the control (ownership) and governance structures of Korean firms. We pay attention to their determinants and their consequences. Lastly, we raise methodological concerns in existing studies and also discuss research topics for future research.

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Levi and Welch (2020) argue that market beta and asymmetric downside beta are highly correlated and that most of downside beta's explanatory power stems from market beta. This study re-examines the relationship between stock returns and downside beta in the Korean stock market. We test beta spreads including beta asymmetry (i.e., down beta - up beta spread) and relative downside beta (i.e., down beta - market beta spread) to control for the market beta. We find negative correlations between downside betas and stock returns even after controlling for market beta and firm characteristics. We also find that regardless of market conditions (i.e., bear, neutral, and bull markets) high beta spreads are associated with low returns. Accordingly, zero-cost portfolios that purchase the stocks in the low quintile of beta spreads and sells the stocks in the top quintile generate significantly positive alphas. These findings underline that downside beta contains the unique information beyond market beta in the Korean stock market.

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This study investigates whether pre-meeting vote disclosures by large asset owners can amplify the influence of their votes at shareholders' meetings. We utilize the newly adopted 2019 rule that mandates Korea’s National Pension Service (NPS) to disclose voting decisions before the shareholders’ meeting. Firms subject to this pre-meeting disclosure must meet either of two conditions: the NPS holds at least 10% of the firm’s voting shares or the firm’s weight in the NPS domestic equity portfolio is at least 1%. Employing a regression discontinuity design and difference-in-differences analyses, we find that the NPS pre-meeting disclosure causes other institutional investors to increase their conformity to the NPS votes. We further find that this effect mainly originates from the resolutions that the NPS votes against management; this result is pronounced among the institutional investors who are more likely to face problems related to conflicts of interest.

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Educational background in Korea can represent personal traits, since academic tracks in the Korean educational system are determined earlier in the individual’s lifetime than in other countries. This study investigates whether CEO educational background affects the firm’s external financing choices. We find that firms with CEOs who majored in science or engineering are less likely to issue equity, and the investment of firms with such CEOs is more responsive to cash flow. We also find that equity issue announcements by firms with such CEOs exhibit more negative market reaction, suggesting that those have bad signals, for instance, poor conditions to issue debt even though they prefer debt to equity. Overall, our study suggests that Korean CEOs’ educational background, particularly science or engineering, is related to managerial confidence, which is the belief that the market undervalues their firms. However, we cannot completely rule out the endogeneity concern arising from CEO-firm matching.

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This paper examines the effect of issuance of ELS(Equity Linked Security) with the Hong Kong HSCEI index as an underlying asset, on the volatility skew in the Hong Kong options market. The most common structure of ELS includes an autocallable option every 6 month and 3-year time-to-maturity, which pursues medium-return along with medium-risk. When trading ELS as an issuer, traders are exposed to various risks in the process of hedging - typically the vega risk caused by changes in volatility. In the case of ELS with knock-in put option, the issuer’s position is generally similar to taking a long position in a put option at the moment of issuance, so vega hedge is normally executed through selling vanilla options. As the ELS with global stock indices as underlying assets has become popular since 2014, local securities companies have begun to adopt volatility surfaces to evaluate the fair price of ELS for the purpose of increasing the book sizes and enhancing trading performance. Accordingly, the demand for selling options with specific strike prices is matched with the autocall barriers. We analyze the effect of ELS issuance on market volatility including the VHSCEI index. The volatility skew is defined as the difference between the volatility indexes of the OTM(Out-of-The-Money) put option and those of the ATM(At-The-Money) option. Since the first autocall barriers of ELS are located on 80% to 95% of the strike price, the volatility index of the 90% strike put option is used. So far, most studies related to ELS examined the effect of issuance on the trading volume and volatility of underlying assets. Even in the previous studies on the effects of delta and gamma (or vega) risk hedging on the volatilities, the effect on only short-term volatility such as realized volatility or VKOSPI index was analyzed. Also there are various studies on the way of calculating the volatility surface depending on maturity and strike price. But there was no studies on the effect of the issuance of structured products in one country on the option market in another country. This study is the first study on the effect of issuance of structured products in Korea on the volatility skew in the Hong Kong options market. The detailed results are as follows. First, as the issuing volume of ELS increases, market volatility such as VHSCEI index decreases, and in particular, VHSCEI index decreases more relative to the realized volatility. This is consistent with the results of previous studies. Also, issuance of ELS lowers the volatility index of the 90% put option compared with the VHSCEI index. Second, with respect to the volatility skew of the same maturity, a strong negative correlation between the ELS issuance volume and the volatility skew since 2014 is observed. It can be interpreted that the volatility of OTM put options decreases compared with the ATM ones as the selling pressure for the OTM increases compared to the ATM. These results are the same for all OTM put options. As a result, if the volume of financial products with the same structure increases significantly, and in particular, if the underlying assets, maturities, and strike prices of the financial products are concentrated, the impact of volatility on the options market can be expected to be larger. It is necessary to sophisticate the issuing and book-managing strategies to diversify the risk of the ELS issuer and to enhance the product’s yield in the future.

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According to behavioral finance, the effect of attention in the stock market has a significant impact on investor decision-making. Individual stocks of high investor attention increase investor irrational bias, such as overconfidence, and this psychological bias causes an overreaction to the asset. Overconfidence investors make aggressive transactions, and investor attention causes high trading volume. This study investigates the impact of investor overconfidence on stock returns in the Korean stock market based on the fact that investor confidence due to the effect of investor attention is closely related to trading volume. We present variables that can measure the degree of investor overconfidence in individual assets and analyze the effect of investor overconfidence on stock returns in the Korean securities market. In this study, we present the investor's overconfidence measure (IOC) using the highest trading volume over the past 12 months and the current trading volume. At the end of each month, we form a portfolio of deciles based on IOC to confirm the relationship between stock returns and investors' overconfidence. We focus on extreme portfolios to determine the impact of IOC on future returns. If the investor's overconfidence has a significant negative effect on the stock return, the investor's overconfidence has a relatively low stock return on an extremely high portfolio. As a result, the higher the investor's confidence, the lower the future return. It argued that the relationship between investor overconfidence and stock returns through a zero-cost portfolio strategy in which longs the lowest IOC portfolio and shorts the highest IOC portfolio, the IOC strategy has a significant positive return. This phenomenon is maintained even after considering firm characteristics factors, investor overreaction, volatility, and gambling tendency. The IOC's significant negative predictive power for stock returns is maintained through Fama-MacBeth cross-sectional regression analysis. Furthermore, We reaffirm the results of this study by the proportion of individual investors' trading, the separation of sub-periods, and the past period constituting the IOC. As a result of dividing the portfolio according to the proportion of individual investors, the higher the proportion of individual investors, the more pronounced the significant negative relationship between stock returns and investors' overconfidence. Moreover, the results of the KOSDAQ market where individual investors have a high proportion of transactions and high volatility has a higher return on IOC strategy. The sample period is divided into four sub-periods and analyzed. We confirm that the relationship between investor overconfidence and stock returns is relatively weakened after the financial crisis. In addition, the return on the IOC strategy increases as individual investors' market participation increases after the outbreak of coronavirus in the Korean stock market. These results reaffirm that the IOC fully reflects the psychological changes of individual investors. Finally, as a result of changing the past period constituting the IOC to 6, 18, and 24 months, the IOC strategy has a significant positive rate of return in all past periods. Accordingly, investors' overconfidence in individual assets in the domestic stock market has a significant negative effect on the stock returns and a significant cross-sectional negative predictive power. This study is meaningful in that it studied the effect of investor overconfidence on the stock market due to the effect of interest in individual assets in the domestic stock market. Furthermore, it has implications for related fields in that it presents measures indicating the degree of investor overconfidence in individual assets and presents empirical results. And report the results of controlling several variables closely related to investor overconfidence. These results support the existing argument that investors' overconfidence has a significant effect on stock returns.

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