Asian Review of Financial Research

pISSN: 1229-0351
eISSN: 2713-6531

Past Issues

Past Issues

Asian Review of Financial Research / May 2011 Vol. 24 No. 2

The Impact of Classified Boards on Firm Value : The New Evidence

Seoungpil Ahn,Gwangheon Hong,Doseong Kim

Asian Review of Financial Research :: Vol.24 No.2 pp.367-410

Abstract
The Impact of Classified Boards on Firm Value : The New Evidence ×

This paper reexamines the relation between firm value and classified boards. The previous studies on large-sample data document a negative relation between classified boards and firm value. Event study evidence also shows a positive market response to the elimination of classified boards and a negative announcement effect for the new adoption of classified boards. These results, however, posit a puzzle why then a majority of the U.S. firms maintains this seemingly suboptimal board structure. We attempt to resolve this puzzle. After correcting for the influence of omitted variables and self-selection bias, we find no evidence that such negative relation exists at all. If there is any, we find that classified boards actually enhance firm value. The result explains why classified board structure prevails till recent years. Further, we show that the valuation effect of classified boards is conditional on a firm's information costs. For firms with high monitoring costs, the market perceives that classified boards hurt firm value. However, for firms whose information problem is less severe, the adoption of classified boards is not viewed as detrimental to firm value. This suggests that there are some firms whose organizational structures do not fit with classified boards even though classified boards are value-enhancing for a majority of firms.

Download PDF Export Citation
The Impact of Classified Boards on Firm Value : The New Evidence ×
  • EndNote
  • RefWorks
  • Scholar's Aid
  • BibTeX

Export Citation Cancel

Fund Managers' Skill and Herding in the Korean Active Fund Market

Hyuk Choe;Jee-Hyun Kim

Asian Review of Financial Research :: Vol.24 No.2 pp.411-453

Abstract
Fund Managers' Skill and Herding in the Korean Active Fund Market ×

As fund markets have experienced a tremendous growth internationally, a lot of studies on the performance of funds have been conducted in recent years. At the same time, academic interest to investigate the impact of managerial skills on a fund's performance has also grown. However, due to the short history and the lack of data on the Korean fund market, only a few studies have actually been conducted on the performance of the Korean active fund market. In this study, therefore, we analyze whether and to what extent the performance of Korean funds is influenced by the skill of managers or simply by luck. For this investigation, the bootstrap simulation method is applied. Previous studies traditionally use the persistence test to find out whether the performance of a fund is based on a manager's skill. These studies test whether a past winner continues to show good performance. Since this performance test is based on the short-term performance of funds, we cannot rule out the possibility of the intervention of noise. To solve this problem, recent studies, such as Kosowski, Timmermann, Wermers, and White (2006) and Fama and French (2010) use the bootstrap simulation. Thus, we have decided to apply this methodology to the active fund market in Korea. A simulation run produces a random sample within the period of 95 months, from February 2001 to December 2008. We examine 3,000 simulation runs. Using this method, we derive a distribution of excess returns of funds compared to a return of a benchmark portfolio under the assumption that managers are unskilled. Comparing the distribution from the simulation and the real distribution of excess returns of funds, we are able to estimate if real excess returns are extreme cases under the simulation distribution. In addition, we divide our sample into two groups : one group of funds in the early 2000s and the other group of funds in the late 2000s. We also subdivided the sample into two groups as long- and short-term groups funds that have existed for 5 or more years and those that have existed for less than 1 year, respectively. Fund groups are also sorted out according to the size. In fact, the sample funds are ranked based on their size: if a fund's size is below the median value, the fund is included in the small-size group while the rest is included in the large-size group. While most previous studies have focused on the fund performance itself or the characteristics affecting the performance, our study aims to investigate the impact of fund managers' skills on the fund performance in the Korean active fund market. As far as we are aware, our study is the first study of its kind to ever show also the effect of the herding phenomenon among managers on the possibility of the linkage of fund performance and the skill of managers. Furthermore, we use the methodology that can reduce biases such as survivorship bias and incubation bias, which could appear in the examination of funds. Our major findings are as follows. First, real excess returns exist in a narrow range as compared to the simulation distribution of excess returns, which are derived under the assumption of unskilled managers. This finding suggests that Korean fund managers possess even levels of fund managing skills, neither too superior nor too inferior compared to one another. Second, fund performance is more highly influenced by managers' skill among the funds that belong to the late 2000s group than those of the early 2000s group. This finding suggests that the fund managers' skill has improved over the years. Third, the performance of funds is more likely to be affected by managers' skill in the long-term fund group than in the short-term fund group. This finding implies that fund managers'skill is more likely to affect the performance of funds that are running on a long-term basis. Fourth, the performance of funds based on managers' skill seems similar between a small-size group and a large-size group. At this point, it is important to observe a notable feature of Korea's fund market that is an extremely narrow range of the distribution of real excess returns especially compared to that of the corresponding U.S. market. To identify some potential causes of this difference, we investigate whether the herding phenomenon can be found among fund managers. If managers copy one another in making investment decisions regardless of their access to private information, indeed, the performance among funds is highly likely to be similar. For this investigation, we apply the LSV herding measure developed by Lakonishok, Shleifer, and Vishny (1992). Using this measure, we find that managers in the Korean active fund market herd one another more strongly than in the U.S fund market. We also find that when mangers herd severely, then the effect of managers' skill on the performance of funds is expectedly very limited. This finding suggests that the stronger the herding phenomenon is, the less relevant the skill of fund managers is in the fund performance.

Download PDF Export Citation
Fund Managers' Skill and Herding in the Korean Active Fund Market ×
  • EndNote
  • RefWorks
  • Scholar's Aid
  • BibTeX

Export Citation Cancel

Asymmetry in Incentive Compensation for Fund Managers and their Herd Behavior

Kyeong-Hoon Kang;Eunjung Yeo

Asian Review of Financial Research :: Vol.24 No.2 pp.455-481

Abstract
Asymmetry in Incentive Compensation for Fund Managers and their Herd Behavior ×

Recent global financial crisis has raised some critical questions about the current status of the financial system, including management of systemic risk at both macro and micro level, integrity of the financially regulatory regime, and the overall quality and mechanism of financial infrastructures. Among many other salient issues especially for the academia in the analysis of the cause of the crisis, the asymmetry in an incentive compensation system within the financial industry in particular has been singled out as one of the serious issues to be addressed because the asymmetry in incentive compensation only creates incentives for risk-taking while it fails to penalize financial managers when bets turn sour. Raghuram Rajan (2008) refers to this risk-taking incentive as “It's heads I win, tails you lose.” However, the incentive for risk-taking can account for only a necessary condition for a financial crisis, not a sufficient condition. Even risky investments, as long as they are diversified, for example, can hardly make financial markets unstable. In fact, it seems more likely to take the combination of investors' both incentives to take excessive risky investments and herding behavior to ignite a financial crisis. This paper, therefore, theoretically investigates the effect of the asymmetry in incentive compensation for fund managers on their herding behavior in investment, based on the canonical model of Bikhchandani, Hirshleifer and Welch (1992, hereafter abbreviated as BHW). Without a rigorous examination, indeed, it is very difficult to accurately assess the effect as to whether it is positive or negative. For example, if fund managers sufficiently take into account their predecessors' activities in their decisions, they are likely to discount the informational value of those activities and the possibility of information cascade will be, therefore, lower. On the contrary, if the effect of the incentives for individual fund managers to take risky investments is greater than that of the depreciation of the informational value of the predecessors' investment activities, the asymmetry in incentive compensation can precipitate the information cascade and herd behavior in investment. Thus, our theoretical model analyzes the effect of asymmetry in incentive compensation for fund managers on their herding behavior by introducing asymmetric costs related to investment decision. In other words, these costs could be regarded as the opportunity costs in investment decision. In fact, these costs play key roles in our model; if these costs are assumed to be less than half like in our model, fund managers anticipate higher rates of return than that in the benchmark case by making decision of riskier investment than the market portfolio. This means that the opportunity costs in the model are relatively lower than those in the benchmark case. It is, thus, important to note that if these costs are assumed to be just half, as in a benchmark case, they are the opportunity costs when fund managers make any investment decisions that show the same risk with the market portfolio. All other fundamental assumptions are similar to the BHW (1992). We have shown the following theoretical results. First, with asymmetric incentive compensation in which fund managers' gains for success are larger than their losses for failure, the fund managers are more likely to be optimistic compared to the case of symmetric incentive compensation. Second, with asymmetric incentive compensation, wrong up-cascades are more likely to occur and less likely to stop, compared with wrong down-cascades. In our model, a wrong cascade is defined as information cascades occurring in the opposite direction of ex-post investment state. On one hand, a wrong up-cascade is a cascade where ex-post investment state is bad while investment decision has been made by individual fund managers. On the other hand, a wrong down-cascade is a cascade where ex-post investment state is good while investment decision has not been made by individual fund managers. Third, with asymmetric incentive compensation, wrong up-cascades start earlier than the case with symmetric incentive compensation does. These theoretical results imply that fund managers are, in fact, likely to hold too optimistic approach to their investment with asymmetric incentive compensation. Our findings further imply that the asymmetry in the incentive compensation scheme may exacerbate wrong cascades and herd behavior in investment, thus causing the financial system to be more unstable. Therefore, it is necessary to consider this asymmetry carefully in designing in order for the fund managers' incentive compensation scheme to generate desirable effects. Since the recent global financial crisis, regulatory reforms or provisions of best practice of compensation scheme for prudent risk management have been widely discussed at both international and domestic levels. For example, the Financial Stability Board has proposed principles for sound compensation practice and its implementation standards, focusing on governance structure, pay structure and risk alignment, disclosure of compensation scheme, and supervisory issues. The Korean government is also preparing policy measures related to the compensation practice in order to curb risk-taking in financial institutions, which is along the lines with the recommendation of Financial Stability Board. Our findings imply that regulatory authorities should consider more appropriate compensation schemes that reduce this asymmetry such as deferring incentive pay so that it is better linked to long-term performance.

Download PDF Export Citation
Asymmetry in Incentive Compensation for Fund Managers and their Herd Behavior ×
  • EndNote
  • RefWorks
  • Scholar's Aid
  • BibTeX

Export Citation Cancel

A Study on the Interaction of Product Market Competition and Internal Corporate Governance on Corporate Payout Policy and Investment Decision

Kyung Suh Park;Hee Sub Byun;Ji Hye Lee

Asian Review of Financial Research :: Vol.24 No.2 pp.483-522

Abstract
A Study on the Interaction of Product Market Competition and Internal Corporate Governance on Corporate Payout Policy and Investment Decision ×

This paper investigates whether the effect of internal corporate governance on the corporate dividend and investment decisions differs depending on the level of product market competition. Many existing literatures have argued that good internal corporate governance leads to increased dividend for investor protection. However, these arguments appear to have overly generalized the realities of complex process of corporate managerial decision making. As long as the purpose of good corporate governance is to increase firm value by inducing an effective operation of corporate resources, shareholders would want not only to receive higher dividends, but also to allow managers to invest in good projects so as to enhance long-term firm value. This paper, therefore, investigates the managerial decisions on dividend payout and investment, the two most important financial decisions with substitutional characters, and how these decisions are being affected by both the competitive and non-competitive product market environments. As far as we are informed, this is the first paper of its kind which analyzes the impact of interaction between internal corporate governance and product market competition on managerial decisions, especially on the dividend payout and investment decision. In a competitive product market in general, as managers are subject to higher default risks and turnover sensitivity to performance, potential agency problems (e.g., overinvestment) tend to decrease. In this context, we hypothesize that in competitive product markets, shareholders permit managers to reduce dividend and increase investment for the purpose of enhancing firm value. On the other hand, in non-competitive product markets where an overinvestment problem still exists, shareholders are likely to be reluctant to follow managers' investment decisions and may ask for higher level of dividend payment instead. As such, we conjecture that in a competitive product market good internal corporate governance induces managers to expand investment expenditure and reduce dividend, and our claim is well supported by the following existing literatures. In competitive product markets: (i) as managers assume higher default and predatory risk, potential overinvestment problems can be reduced (La Porta et al., 2000); (ii) firms have more incentives to increase their market shares by investing in new products rather than in non-competitive product markets (Fellner, 1951; Scherer, 1980); (iii) managers are more likely to be enticed to maximize the productivity sensitivity to investment by minimizing the cost (Nickell, 1996). In sum, in a competitive product market, good internal corporate governance disciplines the managers to use internal capital more on valuable investment than on dividend payout. On the other hand, in a non-competitive product market, managers are more likely to over-invest, and shareholders are more likely to oppose a manager's investment decision and ask for higher level of dividend. The sample of our paper consists of 581 companies listed on the Korea Stock Exchange for the fiscal years from 2004 to 2008. We have chosen to examine the Korean economy so as to avoid estimation bias by controlling for any noisy effect of other external disciplinary mechanisms. The Korean economy is known for its competitive product markets while external corporate governance components such as managerial labor market and market for corporate control require further improvement. As we are investigating the interaction of product market competition and internal governance, we want to remove any external noise other than the product market competition, and the data from the Korean firms allow us the convenience, providing clearer relationship between external and internal governance. In our empirical test, we investigate how internal corporate governance actually affects dividend policies and investment decision making in both competitive and non-competitive product market environments, using interaction variables between internal corporate governance index and competition dummy variables. Additionally, we divide the samples into two groups of firms: those which belong to business groups (chaebol) and stand-alone firms, while carrying out the same analysis for both groups. As firms in business groups have internal capital market that mitigates financial constraint, they are less exposed to the discipline of product market competition than stand-alone firms are. Therefore, in a competitive product market, only stand-alone firms benefit from good internal corporate governance as a way to increase the investment. The empirical results are as follows: in general, good internal corporate governance leads to higher investment and a lower level of dividend or share repurchase in competitive product markets than in non-competitive industries. On the other hand, in non-competitive product markets where managers' overinvestment problem is not properly controlled, good internal corporate governance leads to a higher level of dividend or share repurchase and less investment expenditure. The results are consistent with our hypothesis. We also check to find out whether these findings are influenced by the financing capability of firms by implementing the same analysis to both categories of sample firms, chaebol or independent firms. In the competitive product market, while chaebol firms with good internal corporate governance do not increase investment expenditure, stand-alone firms with good internal corporate governance significantly increases investment expenditure. The result shows that chaebol firms are not affected by product market competition in their investment decision since they have internal product and capital markets. On the other hanThis paper investigates whether the effect of internal corporate governance on the corporate dividend and investment decisions differs depending on the level of product market competition. Many existing literatures have argued that good internal corporate governance leads to increased dividend for investor protection. However, these arguments appear to have overly generalized the realities of complex process of corporate managerial decision making. As long as the purpose of good corporate governance is to increase firm value by inducing an effective operation of corporate resources, shareholders would want not only to receive higher dividends, but also to allow managers to invest in good projects so as to enhance long-term firm value. This paper, therefore, investigates the managerial decisions on dividend payout and investment, the two most important financial decisions with substitutional characters, and how these decisions are being affected by both the competitive and non-competitive product market environments. As far as we are informed, this is the first paper of its kind which analyzes the impact of interaction between internal corporate governance and product market competition on managerial decisions, especially on the dividend payout and investment decision. In a competitive product market in general, as managers are subject to higher default risks and turnover sensitivity to performance, potential agency problems (e.g., overinvestment) tend to decrease. In this context, we hypothesize that in competitive product markets, shareholders permit managers to reduce dividend and increase investment for the purpose of enhancing firm value. On the other hand, in non-competitive product markets where an overinvestment problem still exists, shareholders are likely to be reluctant to follow managers' investment decisions and may ask for higher level of dividend payment instead. As such, we conjecture that in a competitive product market good internal corporate governance induces managers to expand investment expenditure and reduce dividend, and our claim is well supported by the following existing literatures. In competitive product markets: (i) as managers assume higher default and predatory risk, potential overinvestment problems can be reduced (La Porta et al., 2000); (ii) firms have more incentives to increase their market shares by investing in new products rather than in non-competitive product markets (Fellner, 1951; Scherer, 1980); (iii) managers are more likely to be enticed to maximize the productivity sensitivity to investment by minimizing the cost (Nickell, 1996). In sum, in a competitive product market, good internal corporate governance disciplines the managers to use internal capital more on valuable investment than on dividend payout. On the other hand, in a non-competitive product market, managers are more likely to over-invest, and shareholders are more likely to oppose a manager's investment decision and ask for higher level of dividend. The sample of our paper consists of 581 companies listed on the Korea Stock Exchange for the fiscal years from 2004 to 2008. We have chosen to examine the Korean economy so as to avoid estimation bias by controlling for any noisy effect of other external disciplinary mechanisms. The Korean economy is known for its competitive product markets while external corporate governance components such as managerial labor market and market for corporate control require further improvement. As we are investigating the interaction of product market competition and internal governance, we want to remove any external noise other than the product market competition, and the data from the Korean firms allow us the convenience, providing clearer relationship between external and internal governance. In our empirical test, we investigate how internal corporate governance actually affects dividend policies and investment decision making in both competitive and non-competitive product market environments, using interaction variables between internal corporate governance index and competition dummy variables. Additionally, we divide the samples into two groups of firms: those which belong to business groups (chaebol) and stand-alone firms, while carrying out the same analysis for both groups. As firms in business groups have internal capital market that mitigates financial constraint, they are less exposed to the discipline of product market competition than stand-alone firms are. Therefore, in a competitive product market, only stand-alone firms benefit from good internal corporate governance as a way to increase the investment. The empirical results are as follows: in general, good internal corporate governance leads to higher investment and a lower level of dividend or share repurchase in competitive product markets than in non-competitive industries. On the other hand, in non-competitive product markets where managers' overinvestment problem is not properly controlled, good internal corporate governance leads to a higher level of dividend or share repurchase and less investment expenditure. The results are consistent with our hypothesis. We also check to find out whether these findings are influenced by the financing capability of firms by implementing the same analysis to both categories of sample firms, chaebol or independent firms. In the competitive product market, while chaebol firms with good internal corporate governance do not increase investment expenditure, stand-alone firms with good internal corporate governance significantly increases investment expenditure. The result shows that chaebol firms are not affected by product market competition in their investment decision since they have internal product and capital markets. On the other hand, in the case of stand-alone firms who face higher level of financial constraint, interaction between product market competition and internal corporate governance plays an important role in the process of corporate investment decision. d, in the case of stand-alone firms who face higher level of financial constraint, interaction between product market competition and internal corporate governance plays an important role in the process of corporate investment decision.

Download PDF Export Citation
A Study on the Interaction of Product Market Competition and Internal Corporate Governance on Corporate Payout Policy and Investment Decision ×
  • EndNote
  • RefWorks
  • Scholar's Aid
  • BibTeX

Export Citation Cancel

Market Microstructure in the Korean Financial Markets : A Survey

Kyong Shik Eom

Asian Review of Financial Research :: Vol.24 No.2 pp.525-620

Abstract
Market Microstructure in the Korean Financial Markets : A Survey ×

We provide the first comprehensive review of the market microstructure literature on the Korean financial markets, published in the five leading Korean journals from 1990 to mid-2010. We also offer some perspective on the literature for investors, exchange officials, policy makers, and regulators and provide a roadmap for future research endeavors. This paper includes the following five main categories: (1) micro aspects of the microstructure world: orders and trades, basic market quality, price discovery, and trading mechanisms; (2) trading protocols: rules and regulations related to trading; (3) market transparency; (4) market macrostructure; (5) expansion of market microstructure to the fields of investments and corporate finance. We find that the current status of the Korean market microstructure research is as follows. The research in the Korean market microstructure has been disproportionately concentrated into the two categories of micro aspects and trading protocol. However, most of them were conducted during the 1990s, which has limited the perspectives on the academic and policy implications by periods, subjects, and trading protocols. The research on the categories of transparency and market macrostructure is very limited, even though these areas contain features of Korean markets that are unique among world markets. The research of market microstructure combined with investments has been fairly active, whereas that combined with corporate finance is at its inception.

Download PDF Export Citation
Market Microstructure in the Korean Financial Markets : A Survey ×
  • EndNote
  • RefWorks
  • Scholar's Aid
  • BibTeX

Export Citation Cancel

Review of Empirical Studies on IPO Activity and Pricing Behavior in Korea

Mun-Soo Choi

Asian Review of Financial Research :: Vol.24 No.2 pp.621-663

Abstract
Review of Empirical Studies on IPO Activity and Pricing Behavior in Korea ×

This paper reviews the hypotheses and empirical evidence that have been proposed to explain IPO activities and pricing behavior in Korea. The paper particularly reviews empirical evidence and explanations related to the three patterns associated with Korean IPOs: underpricing, hot issue markets, and long-run underperformance. Explanations for underpricing can be grouped under two broad categories: deliberate underpricing and behavioral approaches. The first category can be divided into two subcategories: asymmetric information and price stabilization. While the first subcategory attempts to explain underpricing in the efficient market framework and consider it as a part of the costs associated with IPOs, the last subcategory turns to one of the services that underwriters use to provide price stabilization. While the hypotheses based on asymmetric information are well established and supported by the literature, the significant variation in the degree of underpricing over time together with the poor long-term performance makes many researchers doubtful whether information-based theories could be enough to explain the large initial returns. Some researchers thus turn to behavioral explanations which put more emphasis on the effect of investors' irrational behavior or sentiment on stock prices. Evidence suggests that no hypothesis can dominantly explain large initial returns. Thus the hypotheses reviewed here are not mutually exclusive and a given hypothesis can be more relevant to some IPOs than to others.

Download PDF Export Citation
Review of Empirical Studies on IPO Activity and Pricing Behavior in Korea ×
  • EndNote
  • RefWorks
  • Scholar's Aid
  • BibTeX

Export Citation Cancel

Payout Policy in Korea : A Review of Empirical Evidence

Sungmin Kim

Asian Review of Financial Research :: Vol.24 No.2 pp.665-723

Abstract
Payout Policy in Korea : A Review of Empirical Evidence ×

There have been fundamental changes in corporate dividend policy over the last several decades. Firms decide whether to pay out the corporations' earnings to shareholders as dividends and share repurchases or to keep the profits as retained earnings for future investments. Corporate payout policy is a complicated financial decision- making process that considers future growth opportunities and corporate governance, as well as financing conditions in markets. Determining the payout amount is crucial for corporate finance managers since it is directly related to firm value. Korean corporations' payout policy has changed dramatically since the Asian financial crisis in 1997.Until the Asian financial crisis, the Korean stock market had not experienced the appropriate conditions to test the various hypotheses based on dividend theory because firms did not have an optimal dividend policy based on their needs and capabilities to maximize firm value. However, after 1997, the paradigm shift in the business environment brought about shareholder-value maximization management, transparency enhancement in corporate governance, and investor-favorable regulation changes, making the Korean stock market more qualified for sophisticated empirical tests of payout policy. This paper reviews the empirical evidence on dividends and stock repurchases over the last three decades in Korea that consider market imperfections such as tax, information asymmetry, and agency costs. Also this paper covers the major survey results on dividend policy.

Download PDF Export Citation
Payout Policy in Korea : A Review of Empirical Evidence ×
  • EndNote
  • RefWorks
  • Scholar's Aid
  • BibTeX

Export Citation Cancel

1
Export citation