Asian Review of Financial Research

pISSN: 1229-0351
eISSN: 2713-6531

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Asian Review of Financial Research / December 2006 Vol. 19 No. 2

Liquidity Formation and Price Discovery

Woo-baik Lee;Hyuk Choe

Asian Review of Financial Research :: Vol.19 No.2 pp.1-38

Abstract
Liquidity Formation and Price Discovery ×

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.

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An Empirical Study on the Effects of Bundling and Information Spillover from the KOSDAQ Primary and Secondary Markets

Mun-Soo Choi;Soo-Young Jun

Asian Review of Financial Research :: Vol.19 No.2 pp.39-72

Abstract
An Empirical Study on the Effects of Bundling and Information Spillover from the KOSDAQ Primary and Secondary Markets ×

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.

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Trading Strategy and Performance by Investor Types inKorean Treasury Bond Futures Market

Seung Hyun Oh;Sang Buhm Hahn

Asian Review of Financial Research :: Vol.19 No.2 pp.73-103

Abstract
Trading Strategy and Performance by Investor Types inKorean Treasury Bond Futures Market ×

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).

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Outside Directors and Firm Value in Korea

Chang-Soo Kim

Asian Review of Financial Research :: Vol.19 No.2 pp.105-153

Abstract
Outside Directors and Firm Value in Korea ×

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.

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Dynamic Nature of Conditional Correlation in East-Asian Equity Markets

Wan-Soo Choi

Asian Review of Financial Research :: Vol.19 No.2 pp.155-187

Abstract
Dynamic Nature of Conditional Correlation in East-Asian Equity Markets ×

This paper examines the correlation estimates for some East Asia equity markets using the CC-MGARCH and DCC-MGARCH. Using daily return series, the equity markets of Korea, Japan, Hong Kong, and Singapore are analysed for the period 1991 to 2005. Parsimonious specifications for the multivariate GARCH framework are used to shed light on the correlation structure of these markets. The dynamic nature of the correlation between pair-wise countries is captured using the dynamic conditional correlation multivariate GARCH framework and explained. First, there are no strong evidence of time-varying correlations for the sample period. However, there are weak evidence of time-varying correlation between some countries in post-crisis period. Second, the correlation breakdowns are occurred between Korea and other countries about the time of the Asian financial crisis, but it do not appear in the case of other countries. Third, the correlation generally has a property of long-run persistence, but the degree of persistence are much weakened between countries except Korea in post-crisis period. Finally, the local extreme shock affects correlation, and there is also a evidence of correlation asymmetry. Namely, the effect of negative extreme shocks are more stronger than that of positive extreme shocks.

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Large Shareholder Ownership and Opportunistic Behavior of Firm's Financing

Jinho Jeong;Jungeun Kwon

Asian Review of Financial Research :: Vol.19 No.2 pp.189-224

Abstract
Large Shareholder Ownership and Opportunistic Behavior of Firm's Financing ×

The purpose of this study is to analyse the effect of the ownership structure on the opportunistic behavior of a firm's financing from the perspective of the agency theory. In this study, we investigate 365 security issuing cases from a sample of non-financial firms listed on the Korean Stock Exchange between 2001 and 2003. The main findings from this study are as follows. Firstly, we find that opportunistic financing only exists for equity issuing firms. For debt issuing firms, there is no evidence of opportunistic behaviour. The results imply that fixed commitments of debt financing reduces the motivation to sell overvalued debt to outside investors. Secondly, we find that increase in large shareholder ownership for equity issuing firms resulted in the decrease of opportunistic behavior, thus supporting the agency theory. Finally, we find that the information asymmetry in the equity issuing market induces a firm's manager to sell overvalued equity to outside investors. Our findings suggest that more efforts are needed to guarantee the transparency in the capital raising market to protect innocent outside investors.

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