Asian Review of Financial Research

pISSN: 1229-0351
eISSN: 2713-6531

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Asian Review of Financial Research / December 2002 Vol. 15 No. 2

Market Response on Stock Options and Firm Characteristics

Chang-Soo Kim

Asian Review of Financial Research :: Vol.15 No.2 pp.1-42

Abstract
Market Response on Stock Options and Firm Characteristics ×

This paper investigates the relationship between firm characteristics and the capital market response to the introduction of stock options. The capital market responds positively to the announcement of adopting stock options. However, the positive response is significant only over the period of clustered announcement dates. In addition, the announcement effect of manufacturing firms is significantly positive, while that of financial companies is negative For manufacturing firms, the announcement effect has a positive relationship with the growth potential and capital efficiency and a negative relationship with the size, liquidity, labor costs and leverage. Thus, the smaller growing firms with liquidity constraints and low leverage adopt stock options to get over the agency problem and compensate a relatively low salary of their employees. However, the variables for chaebol affiliation and the stock price volatility are not significant. The results for financial firms are almost identical except for the positive coefficient of liquidy variable.

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Price Limits, the Nature of Equity Options, and the Risk-Neutral Valuation

Jin Yoo

Asian Review of Financial Research :: Vol.15 No.2 pp.43-65

Abstract
Price Limits, the Nature of Equity Options, and the Risk-Neutral Valuation ×

This paper reveals two properties of equity options in a market with price limits on their underlying assets. The first one is that an eq 비 ty option in such a market is equivalent to a portf이 io of a risk-free zero-coupon bond and equity options without price limits. The second one is that an equi ty option with price limits is path-dependent. This paper also discusses whether it is legitimate to use the risk-neutral valuation to price such an option. Finally this paper exemplifies a simplified numerical approach to identify the payo什distribution of such an option, incorporating its path-dependency.

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A Venture Company Valuation Model and the Empirical Study On the Effect of Intellectual Asset Value

Won Heum Lee;Su Mi Choi

Asian Review of Financial Research :: Vol.15 No.2 pp.67-106

Abstract
A Venture Company Valuation Model and the Empirical Study On the Effect of Intellectual Asset Value ×

We introduce a theoretical valuation model of the venture company's firm value. The most important characteristic of this model is its capacity to estimate the value of intellectual assets. as well as the enterprise. uSing publicly disclosed financial data. The valuation model consists of six groups of publicly available information ; namely. current financial assets. current and the prior period's tangible asset, current and the prior period 's net working capitals. current operating income, current expenses of knowledge management, and current investment assets. Because this makes the model very practical to apply in anal yses, it is possible to apply this model of firm value valuation to suit individual venture companies. The results of the positive study are as f이 lows . First, the size of intellectual assets. which is estimated from the expenses of knowledge management and networking investment turns out to be sizable. The estimated size of intellectual assets is reported to be 0.7 to 1.0 times of total assets in the balance sheet Second. the venture company valuation model can be used to estimate the proportion of the traditional value (including tangible asset value, working capital value and earnings' value) , and the intellectual asset value (including technology. marketing, management, and networking asset values). The weight of each asset value is reported to be 40% : 60% in case of venture companies and 33% : 67% for internet companies.

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On the Incentives of Firms and Credit Banks under Corporate Restructuring and Debt-Equity Swaps

Kyung Suh Park;Eunjung Lee;Hasung Jang

Asian Review of Financial Research :: Vol.15 No.2 pp.107-141

Abstract
On the Incentives of Firms and Credit Banks under Corporate Restructuring and Debt-Equity Swaps ×

This paper analyzes the incentives of credit banks and firms that face financial crisis, focusing on their debt-equity swaps. Empirical analyses show that firms with larger asset sizes, higher debt ratios, lower debt coverage ratios, lower ownership by largest shareholder, and smaller fixed assets tend to implement debt-equity swaps. It also shows that banks with lower BIS ratios and higher loan concentration prefer debt-equity swaps as a way of restructuring failing corporate customers. These results provide an indirect evidence that supports too-big-to-fail hypothesis in corporate loan market.

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Difference between Mean-Variance and Mean-VaR Approach in the Optimal Risky Portfolio

Jinho Kim

Asian Review of Financial Research :: Vol.15 No.2 pp.143-172

Abstract
Difference between Mean-Variance and Mean-VaR Approach in the Optimal Risky Portfolio ×

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An Investigation of Hedging Performance of KTB Futures

Jin Ho Jeong;Byung Jin Yim;Chong Hyun Won

Asian Review of Financial Research :: Vol.15 No.2 pp.173-204

Abstract
An Investigation of Hedging Performance of KTB Futures ×

This study investigates hedging performance of KTB futures with respect to KTB and various bond portfolios uSing VECM, VAR, Bivariate GARCH (1 ,1) and OLS regression models. Both weekly and daily hedging performance is evaluated. The sample period covers from January 4, 2000 to June 30, 2001. We found the f이 lowing results. Firstly, unit roots are found in KTB futures and various spot prices. Secondly, we can not find statistical differences among hedge ratios estimated from VECM, VAR. Bivariate GARCH (1 , 1) and OLS regression models. Thirdly, there are no significant differences in hedging performance among various models. Fourthly, weekly hedging produces the better hedging performance than daily hedging. Finally, overall hedging performance of KTB futures is relatively poor. This result implies that underlying spot bond portf이 io comprising KTB futures does not represent spot interest rate movements very well. It seems that we need more various futures products in KTB futures to enhance the hedging performance.

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Long -Run Relationship of Stock Prices and Macroeconomic Variables With a Structural Break

Sung-Chang Jung;S. Young Chung

Asian Review of Financial Research :: Vol.15 No.2 pp.205-235

Abstract
Long -Run Relationship of Stock Prices and Macroeconomic Variables With a Structural Break ×

This paper investigates the long-run equilibrium relationship between stock prices and six macroeconomic variables, using Jonhansen's co-integration analysis. In addition, using Hansen and Johansen (1993)'s recursive likelihood ratio test of the constant cointegration space, this study analyzes the stability of cointegraing vectors, i.e, the structural shift of the relationships between the macroeconomic variables We find that the Korean market is cointegrated with six macroecomonic forces However , the regime shift was found some time in 1987. Thus, with the dummy variable for the structural changes, this study investigates the long-run relationship between the stock prices and macroeconomic variables and shows that the signs of co-integrating vector are the same as the signs expected by the hypotheses. The stock prices are negatively related with the long-term interest rate, the oil prices and Korean won against the US dollars, and positively related with the inflation, the industrial production, and the supply of money.

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Relationship Between Entry of Internet Banking and Production Costs

Keuk Ryoul Yoo

Asian Review of Financial Research :: Vol.15 No.2 pp.237-259

Abstract
Relationship Between Entry of Internet Banking and Production Costs ×

Introduction of internet banking will expand banking market, lower marginal production costs and make customers more sensitive to interest rates of financial products. The sensitivity can be represented by hazard rate. It is expected that market price will fall and quantity demanded will rise in equilibrium. Whether a bank introduces internet banking relies on the entry cost, the marginal cost reduction , the hazard rate and the degree of market expansion It is more likely for an incumbent bank to introduce internet banking when the entry cost is lower, the marginal cost reduction is higher the hazard rate is higher or the degree of market expansion is greater ‘ Introducing internet banking can be used as an entry deterrence measure.

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Palace Coup, CEO Compensation, and Optimal Investment Choice

Sooyoung Song

Asian Review of Financial Research :: Vol.15 No.2 pp.261-296

Abstract
Palace Coup, CEO Compensation, and Optimal Investment Choice ×

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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Risky Debt Valuation

Joon-Hee Rhee;Yoon-Tae Kim

Asian Review of Financial Research :: Vol.15 No.2 pp.297-329

Abstract
Risky Debt Valuation ×

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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