In this paper, we examine the crowded equity positions fomented by foreign investors in the Korean stock market. As the participation of foreign investors accelerates globally, understanding the impact of foreign investors on the stock market has become central. Specifically, as groups with shared common interests or information often engage in similar actions, it is widely recognized that foreign investors "flock together" or "herd" in the stock markets. This influence of foreign investors can have dual effects. On the one hand, their participation can facilitate price discovery by quickly reflecting information in the stock market. On the other hand, it can lead to liquidity shortages, potentially causing a trigger for fire sales. Consequently, there has been a long-standing discussion about the participation of foreign investors and its potential to cause destabilization in the stock markets. However, studies on the impact of foreign investors in the Korean stock market are still limited, with a focus on their trading volume or ownership. This paper aims to bridge the gap by examining the crowded equity positions by foreign investors. Crowdedness is a situation where the ownership proportion of a specific group of stocks is excessively high compared to their liquidity. We focus on the crowdedness of foreign investors by calculating the shareholdings of the foreign investor group as a percentage of average daily trading volume, which is called Days-ADV. Days-ADV shows the time it takes for the foreign investor group toliquidate their holdings of the respective stock. Therefore, even if the ownership is low, Days-ADV can be high if the turnover rate of the stock is low, while even if the ownership is high, Days-ADV can be low if the turnover rate of the stock is also high. As evident from the definition, this proxy enables a more direct examination of the impact of foreign investors’herding behavior on stock prices by incorporating their ownership and stock liquidity. Our research investigates the impact of foreign investors on the Korean stock market, with Days-ADV as our key variable of interest. The results of our study are as follows. First, portfolio-level analyses and firm-level cross-sectional regressions indicate a significant positive relation between the Days-ADV and stock returns in the subsequent month. For example, the high-minus-low (H-L) Days-ADV portfolio, which buys the top 20% of stocks and sells the bottom 20% of stocks based on the rank of the Days-ADV at the end of the month, yields a return of 1.32% (t-statistic = 2.97) in the following month. Furthermore, this positive premium of the Days-ADV is not driven by foreign ownership or illiquidity. It implies that the Days-ADV, a composite measure of foreign ownership and illiquidity, provides additional information on future stock returns. Second, we find no evidence that the crowdedness of foreign investors leads to relatively larger drawdowns during distress periods. During the crisis period, the high Days-ADV portfolio exhibits a significantly negative return of -1.82% (t-statistic = -2.20). However, in comparison, the H-L portfolio still shows positive return of 1.29% (t-statistic = 1.19). Lastly, we find that the Days-ADV predicts future earnings surprises significantly in a positive direction. The predictive power is most pronounced for the upcoming earnings announcement and gradually diminishes over time; the predictive power remains significant for up to the following three quarters’ earnings announcements. We also find that the abnormal return of the H-L portfolio based on the crowdedness of foreign investors is intensified in stocks with higher sensitivity to export growth, the S&P 500 index, and won-dollar exchange rates. These findings support the argument that the return predictability of the crowdedness of foreign investors could occur as they flock to specific stocks through information superiority. This study contributes to the understanding of the impact of foreign investors’ behaviors in several ways. First, this is the first study to examine the impact of the crowdedness of foreign investors on stock returns in the Korean stock market. In contrast to previous studies that primarily focus on the effects of foreign investor ownership or herding behaviors, this study introduces a new anomaly based on the crowdedness of foreign investors. Second, our study aids in understanding whether the crowdedness of foreign investors triggers fire sales during the exogenous shock period. Lastly, our paper helps to understand the factors underlying the abnormal returns generated by the crowdedness of foreign investors. We expect that these results shed light on the role of foreign investors in the Korean stock market and the impact of crowdedness by investor groups on stock prices.

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This paper provides a comprehensive overview and synthesis of extensive domestic and international studies in the private equity market. It delves into encompassing a range of topics including performance, characteristics, risk management, the role within the financial system, and activism, pertaining to hedge funds. Additionally, it explores research focused on performance, GP and LP dynamics, portfolio company, and the legal and macroeconomic ramification, associated with private equity. Regrettably, the majority of the synthesized studies are a global nature, with the Korean literature predominantly centered around VCs due to limitation in data collection. By contrasting international and domestic studies, this paper draws forth significant implications for the Korean private equity market. These implications encompass various aspect, such as revisiting hedge regulations, the reinforcement of hedge fund activism, a reevaluation of the GVC-centered venture capital industry policy, the amplification of VCs’ roles in the IPOs of their portfolio companies, and the exploration of methods to augment value within portfolio companies backed by PE funds.

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This study analyzes the relationship between the psychological price barrier of investors and the phenomenon of short-term return reversal in the Korean stock market. The short-term return reversal phenomenon is an unexplained anomaly in finance. It is usually measured using returns from one month ago. Jegadeesh (1990) and Lehmann (1990) suggest that short-term return reversal may occur due to factors like illiquidity or investors' overreactions. Behavioral finance posits that individual investors are irrational and tend to overreact to private information. Kahneman and Tversky (1979) introduce the concept of the anchor effect, wherein investors rely on reference points for decision-making, similar to a ship anchored and unable to move beyond the length of its anchor line. In the context of behavioral finance, the 52-week highest price serves as a reference point, inducing irrational behavior among investors. Investors treat the 52-week highest price as a psychological barrier, and when stock prices approach this level, they become excessively pessimistic about the asset's prospects. On the other hand, when stock prices are distant from the 52-week highest price, investors tend to hold optimistic views, anticipating that the asset's price will rise. We believe that the psychological price barrier influences investor trading behavior and has a significant impact from a liquidity supply perspective. Therefore, this study builds on prior research to investigate how investor trading behavior and overreactions affect short-term return reversal. It hypothesizes that the 52-week highest price acts as a psychological price barrier, leading to specific expectations. Investors tend to be overly pessimistic about stocks trading near this barrier, hesitating to purchase them. The overreactions of these pessimistic investors do not significantly impact stock returns. In contrast, when stock prices deviate from the 52-week highest price, investors become optimistic, anticipating potential price increases, leading to temporarily overvalued stocks with lower future returns. The study employs common stocks listed on the Korea Exchange (KRX) and the KOSDAQ market from January 2000 to June 2022, with research data obtained from DataGuide. The analysis period starts in January 2000, considering that investor-specific net purchase quantity data is available from January 1999. We conduct empirical analysis using double-sorted portfolio analysis, Fama and Macbeth cross-sectional regression analysis, and triple-sorted portfolio analysis. We use the inverse of the 52-week highest price as the psychological price barrier and consider it based on the month t-1. The reason for using the t-1 month's psychological price barrier is to alleviate concerns that it might have similar effects to short-term return reversal. Also, it's assumed that there is a one-month lag for information about the psychological price barrier to flow into the market and influence investor behavior. Short-term return reversal represents the stock returns in month t. The main findings are as follows: First, the 52-week high's psychological price barrier significantly influences short-term return reversal. The further stock prices are from this barrier, the more pronounced the short-term return reversal becomes. Conversely, when stock prices are close to the 52-week high, the influence of short-term return reversal diminishes. This indicates that the psychological price barrier alters investor trading behavior, leading to overreactions and short-term return reversal. Second, utilizing cross-sectional regression analysis, the study controls for firm-specific factors and reaffirms the impact of the psychological price barrier on stock returns and short-term return reversal. Stocks positioned far from the psychological price barrier exhibit a strong and significant short-term return reversal effect. Additionally, the interaction of psychological price variables and previous month returns shows a significant negative predictive power on stock returns. Third, the study investigates factors that enhance the relationship between the psychological price barrier and short-term return reversal. Prior research highlights that idiosyncratic volatility, lottery-like stocks, and unrealized capital gains overhang play a crucial role in this relationship. Triple-sorted portfolio analysis shows that stocks with idiosyncratic volatility, lottery-like stocks, and unrealized capital losses demonstrate more pronounced changes in investor trading behavior due to the psychological price barrier. This results in a significant short-term return reversal effect due to investor overreactions. In conclusion, the research emphasizes how the psychological price barrier influences investor trading behavior and contributes to short-term return reversal in the Korean stock market. This sheds light on the impact of investor irrationality on the anomaly of short-term return reversal, offering valuable insights for related fields.

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Analysts process various information about firms to provide market participants with earnings forecasts and recommendations. There are both positive and negative views on the usefulness of analyst reports and investment recommendations. Liu et al. (1990) argue that analysts’ stock recommendations are valuable as investment information, as they find that stocks recommended as "buy" by analysts tend to yield positive excess returns, while stocks recommended as "sell" tend to yield negative excess returns. However, according to studies by Bhushan (1989), Irvine (2000), Brown et al. (2015), analysts face conflicts of interest such as the incentive to increase commissions for their affiliated brokerage firms or maintain close relationships with the management of companies. Due to these conflicts of interest, they suggest that the analysts’ recommendations are biased information. Accordingly, analysts can play a role in enhancing market efficiency by providing reports with high-quality information that helps reduce misvaluation of stock prices. However, due to economic conflicts of interest, the possibility remains that analysts might overestimate companies for personal gain, potentially misleading investors and increasing the misvaluation. IPO (Initial Public Offering) underpricing refers to the phenomenon where the offer price of newly issued shares is set lower than their fair value, resulting in the shares being underpriced. As a consequence, the stock price rises significantly higher than the offer price in the aftermarket, leading to substantial initial returns. Previous studies report that IPO stocks tend to exhibit abnormally high initial returns but experience lower returns in the long term (Ritter, 1991; Loughran and Ritter, 1995; Kim and Lee, 2012; Kim, 2016). In the U.S. stock market, a ‘quiet period’ is applied for firms preparing for IPO to protect investors (Bradley et al., 2003; Jia et al., 2019). IPO firms might have incentives to inflate future business prospects and earnings forecasts to obtain a higher valuation for their offer price. The U.S. Securities and Exchange Commission (SEC) has established the quiet period around the IPO date to prevent companies from providing predictive information related to firm valuation, such as sales, operating income, net income, that could influence the offer price and stock price. Unlike the U.S., the Korean stock market does not impose a quiet period on firms gearing up for an IPO. Consequently, it is possible to analyze the effect of analyst reports around the IPO date on stock returns using the Korean data. This study investigates the short-term and long-term returns of firms which analysts cover from the time of their IPOs compared to those that did not, among the newly listed firms on the Korea Stock Exchange during the period from 2010 to 2020. This research empirically examines whether the release of analysts’ reports for IPO firms play a role of providing useful information or playing a role of hype. We find that newly listed firms in the KOSPI (Korean Composite Stock Price Index) with analysts’ coverage tend to earn lower initial returns. And there is no significant relation between analyst coverage and initial returns for newly listed firms in the KOSDAQ (Korea Securities Dealers Automated Quotation). Furthermore, the release of analyst reports is also positively related to one-year excess returns over the industry benchmark. The results suggest that analyst coverage for IPO firms in the Korean stock market play positive roles of improving market efficiency by delivering useful information to market participants and reducing information asymmetry.

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This study explores whether adopting mandatory bid rule mitigates private benefits of control during instances of control transfer. We posit that implementing the mandatory bid rule could motivate the acquirer to self-limit their private benefits of control. According to the model proposed by De la Bruslerie (2013), an acquirer's offer of a higher control premium, signaling their intention to extract more significant private benefits following the control transfer, would likely make minority shareholders more inclined to tender their shares. This is due to the attractive offering price and the elevated risk of expropriation. Such a scenario would invariably necessitate the acquirer to purchase shares beyond the optimal threshold, thereby shouldering the consequential costs. Foreseeing these potential consequences, acquirers would be motivated to reduce the control premium and moderate their intention of extracting private benefits. To test our hypothesis, we exploit the staggered adoptions of mandatory bid rule in 41 nations over a 50-year period (1972 to 2022). We take multiple steps and go through a meticulous process to ensure our samples can accurately measure the private benefits of control. This yields 1,421 deals as the final sample. We define private benefits of control as the relative difference between the price paid to the incumbent blockholder and the market price of shares immediately following the deal announcement, multiplied by the proportion of shares acquired (Dyck and Zingales, 2004). Employing a difference-in-differences approach, our findings align with the theory suggesting that the mandatory bid rule encourages acquirers to reduce the private benefits of control. The deals above the threshold exhibit significantly lower private benefits of control after the rule's adoption, while those below the threshold show negligible changes post-adoption. In tandem, we observe a similar trend with control premiums. The results remain intact to a series of robustness checks. First, the results are even more pronounced when restricting the sample to countries where we have samples before and after the rule adoption. Second, the results survive even when limiting the sample to deals where incumbent controlling shareholders owned substantial equity stakes in the target firms. Third, the results stand firm even after financially distressed target firms are excluded from the analysis. We also find evidence that our results are not merely driven by selection bias, which would occur if acquirers seeking high private benefits predominantly acquired shares below the threshold and acquirers pursuing low private benefits mainly acquired shares above the threshold. Above all, the increase in private benefits of control after adopting the mandatory bid rule for deals below the threshold is substantially smaller in magnitude compared to the decrease in private benefits of control for deals above the threshold. Additionally, the deal-fraction analysis of Lee, Kim, and Kim (2023) reveals that the fraction of deals above the threshold does not drop significantly after adopting the mandatory bid rule. Overall, our study offers the first empirical evidence of the effect of mandatory bid rules on the private benefits of control. Specifically, we show that the mandatory bid rule influences acquirers to reduce the private benefits of control. Our results also provide an important implication for the ongoing debate regarding whether the mandatory bid rule increases acquisition costs. Should the rule lower private benefits of control (and the control premium), as shown in this study, it is unlikely that the acquisition cost will rise, thereby not impeding acquisition activities.

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We empirically analyze the effect of information transfer between the KOSPI200 option market and the stock index market using the call/put option trading value ratio. According to the theoretical framework proposed by Chen et al. (2005), the ratio of call/put trading values is calculated every minute in order to estimate the probability ratio of the index increasing versus decreasing. Then, we implement the indicator-following trading strategy, which buys the index when the benchmark call/put ratio increases more than the pre-defined sensitivity threshold and sells the index when the benchmark call/put ratio decreases more than the sensitivity. Using the calculated daily returns of the indicator-following trading, we test whether the indicator-following trading strategy significantly outperforms the simple buy-hold strategy that takes a long position on the index at the beginning of the market and clears the position when the market closes for each day. If returns of indicator-following trading are significantly larger than the returns of the buy-hold strategy, the empirical results can support the hypothesis that information is disseminated from the KOSPI200 options market to the stock index market, and the call/put ratio can be treated as a predictive information variable. By controlling various environments of indicator-following trading, we investigate market conditions for maximizing the price discovery effect of our information variables: trading timing, trading sensitivity, volatility of the index, time to maturity of the option, and call/put ratios for different moneyness. In addition, we compare the return predictability of our information variables to the call/put option trading volume ratio, take account of transaction costs, and examine the effect of lowering the trading multiplier of the KOSPI200 option. The results of our study are as follows. First, the indicator-following trading on the total call/put ratio exhibits significantly higher returns than the returns of the buy-hold strategy by 18bp on average per day with the corresponding t-statistic of 7.8, which supports the price discovery feature of our information variable for the KOSPI200 index. Also, the return predictability remains effective for a minute under a 1% significance level. Further, we numerically verify the existence of the local maximum point whose sensitivity maximizes the average return per trading of the indicator-following strategy. As the existence of the local maximum is consistent with the theoretical prediction, the underlying theoretical framework could be justified. Second, the return predictability extends to 2 minutes for the call/put trading value ratio on the at-the-money option, which implies that the persistence of the price discovery stems from the trading information of the at-the-money option. The argument is supported by additional empirical tests under different moneyness ranges. Moreover, the shorter the remaining maturity of the option and the greater the volatility of the stock index is, the stronger the price discovery effect becomes. Third, comparing the returns of indicator-following trading, the return predictability of the call/put trading value ratio is superior to the call/put trading volume ratio used in the existing literature. Fourth, when considering actual transaction costs, the indicator-following trading strategy does not generate excess returns, which indicates efficient and immediate information delivery between the actual option market and the stock index market. Lastly, lowering the trading multiplier of the KOSPI200 option improves only the trading performance of the trading strategy using the out-of-the-money options, and we interpret that the policy hinders the efficiency of the out-of-the-money option market. Our study contributes to the strands of literature spanning the market microstructure between the KOSPI200 option market and stock index market, the high-frequency trading, and the policy of the Korean option market. By demonstrating the distinguished and superior return predictability of the call/put option trading value ratio compared to the counterpart of trading volume, we argue that the information can flow from the index option market to the stock index market. That is, our results shed light on the unresolved debate on the direction of the information flow between those two markets. Including the significant persistence of the return predictability of the call/put trading value ratio, various empirical findings under different trading conditions support that the KOSPI200 option market leads the stock index market. Meanwhile, we highlight the importance of using high-frequency data because implementing the high-frequency trading strategy allows us to estimate more precise persistence of return predictability than prior research. Additionally, complementing the extant research reaching conflicting conclusions on the effectiveness of lowering the trading multiplier of the KOSPI200 options, identifying the effect of the policy with the indicator-following trading strategy on call/put trading volume ratio enables us to support the partial efficacy of the policy.

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This paper investigates how the cashflow rights of a parent company’s minority shareholders are affected by a subsidiary listing after a carve-out. It has been argued that the listing of a subsidiary may substantially dilute the cash flow rights of minority shareholders. However, this paper shows that minority shareholders might benefit from such carve-outs particularly when the cost of capital in the initial public offering (IPO) market is low. In a hot IPO market, issuing new shares through the subsidiary’s listing may reduce the cost of finance for the parent’s minority shareholders. In the counterfactual case where the same amount of funds was raised in seasoned equity offering (SEO) of the parent company, the dilution of minority shareholders’ cash flow rights may be greater. In the example of LG Chemical, the cashflow rights of minority shareholders resulting from the IPO of LG Energy Solutions is 54% of LG Chemical, whereas raising the same amount of funds through a SEO without listing the subsidiary company would have resulted in only 46% cashflow rights, indicating that the cashflow rights would be greater in the case of subsidiary’s IPO. Furthermore, the analysis of stock prices shows little evidence of negative impacts of the IPOs of subsidiaries on parent companies’ stock prices. In fact, returns on the parent companies on the announcement of carve-outs or listings are often positive, and long-term stock prices do not indicate that subsidiary listings following carve-outs harm the interests of the minority shareholders. On the contrary, subsidiary listings following carve-outs may benefit the minority shareholders by reducing financing costs in a hot IPO market. Contrary to the recent criticisms against the IPO of LG Energy Solutions, our findings show that the IPO may have increased the cash flow rights of minority shareholders in LG Chemical.

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ESG investing has gained significant traction among institutional investors worldwide. For example, large asset owners such as National Pension Service, CPP Investments, and CalPERS are considering ESG factors in their investment decisions, and this trend is expanding to other institutional investors. In fact, according to Morningstar, ESG fund inflows reached $1.921 trillion in 2021, bringing the global ESG fund universe to $2.744 trillion at the end of 2021. Therefore, from the perspective of institutional investors and asset managers, the question of ‘how’ to enhance their investment portfolios has become a more important agenda than the question of ‘why’ ESG investing should be made. ESG investing strategies will only be sustainable if they can do what they are supposed to do: generate returns. To improve the performance of ESG investing strategies that invest in companies with high ESG scores, we propose an "ESG Integration" strategy that combines style investing based on market anomalies reported in the academic literature. Our results are summarized as followings. Through ESG Integration, which amalgamates style investing strategies with ESG, such as company size (small-cap) and accruals strategies, we find that greater excess returns can be achieved compared to existing ESG-only strategies. For example, compared to the High ESG-only strategy, the High ESG integrated small-cap style strategy outperforms1.136% per month on average. When we integrate the style based on the accrual anomaly into the ESG, we verify the ESG integration strategy has an excess return of 0.386% per month to the ESG-only strategy. This result pertains to absolute performance and risk-adjusted excess returns, as confirmed using the Carhart (1997) four-factor model. Someone can argue that we could get a loss for ESG scores when we undertake ESG integration than ESG-only strategies. However, we confirm there is a little loss to ESG scores even if we integrate ESG into various style investments. Therefore, by integrating ESG and profitable style strategies based on market anomalies reported by academic literature, investors could enhance the performance of ESG-only strategy without suffering a loss of the very purpose of ESG investing. ESG scores vary a lot by industry's specific characteristics. In Korea, for instance, the banking industry averages the highest ESG score among other industries. Meanwhile, the medical device and service industry shows the lowest ESG score. If we do not consider the industry-specific variations in ESG scores when conducting ESG investments, we could construct a portfolio that is overly tilted to specific industries with high ESG scores on average. Therefore, we employ industry-adjusted ESG scores to construct the ESG Integration strategy. Our result shows that the ESG Integration strategy based on industry-adjusted ESG scores also surpasses the performance of an ESG-only approach. How to handle the risk in their asset management is essential to institutional investors, such as public pension plan sponsors. Even a strategy can deliver enormous profits, but if it is very risky to the level of the risk appetite of institutional investors, investors cannot accept undertaking the strategy. From a risk management standpoint, we present that combining ESG with style strategies results in more favorable risk indicators than pure style strategies. Thus, we confirm that integrating ESG and style strategies can yield superior excess returns over existing ESG-only strategies while mitigating risks compared to conventional style strategies. The direction toward sustainable development through ESG has already garnered agreement and perceived necessity among many international participants. Nonetheless, for companies to sustain their ESG activities, ESG investing in the market must be concurrent. For investors, generating profits through ESG investment is paramount. Presently, consensus on ESG investing predominantly centers around major asset owners like pension funds. However, these pension funds primarily aim to provide pensions to beneficiaries through fund management rather than solely addressing social issues or augmenting societal welfare via ESG investing. Therefore, evaluating whether existing ESG strategies genuinely contribute as investment strategies and how they can be enhanced is pivotal. This study holds significance by proposing practical strategies to boost ESG investment performance, ensuring its sustainability. Furthermore, this research offers empirical evidence that supports not only the social value but also the financial value of ESG investing. Such evidence can be pivotal for future governmental and financial authorities in establishing policies and guidelines related to institutional investors' ESG activities, transcending the social value of ESG investments and encompassing its financial value. Lastly, the integrated strategy to enhance ESG performance, built upon comprehensive information encompassing non-financial ESG factors and financial style strategies, requires a high level of expertise in strategy formulation and execution. Determining how to combine and tailor various strategies, constructing portfolios, rebalancing, monitoring, etc., demands substantial resources, systems, and experience throughout the entire investment process. Institutional investors lacking internal resources may boost investment efficiency and stability by actively leveraging Outsourced Chief Investment Officers (OCIO) such as asset management companies.

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