Asian Review of Financial Research

pISSN: 1229-0351
eISSN: 2713-6531

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Asian Review of Financial Research / February 2012 Vol. 25 No. 1

The Impact of Structural Changes on Timing Abilities and Selectivity Skills of Equity Fund Managers

Junesuh Yi

Asian Review of Financial Research :: Vol.25 No.1 pp.1-36

Abstract
The Impact of Structural Changes on Timing Abilities and Selectivity Skills of Equity Fund Managers ×

The sale of funds employing a dollar cost averaging strategy has allegedly started a new era in Korean fund market. In fact, Assets under management (AUMs) of equity funds have dramatically increased and investment patterns of individual investors have changed to indirect and long-term horizon investments since the dollar cost averaging funds settled down. Accordingly, investment management companies have also changed their trading strategies from frequent changes of holding stocks for higher short-term performance to buy and holding stocks, enabling them to timely react to market movement. In addition, securities companies and banks have been actively attracted to the dollar cost averaging funds, resulting in the changes of funds' sale channel. This has profoundly influenced the overall financial industry. However, very little research has been conducted thus far on this issue in academy and practices. Most literatures have overlooked the effect of the dollar cost averaging funds on fund market, thus producing erroneous results. Since the onset of the structural changes in fund market in 2005 when the dollar cost averaging funds started to be sold in full scale, this paper benchmarks that year in examining selectivity skill and timing ability of equity fund managers during pre- and post-structural change periods. I conjecture that the investment companies are more likely to critically alter asset management strategies after the sale of the dollar cost averaging funds, which is supposed to have generated significant effects on the performance of fund managers. Therefore, I investigate the managers' selectivity skills of purchasing (selling) appreciating (depreciating) stocks in advance and their timing ability to switch among fund asset classes in an attempt to profit from the changes in market outlook. In doing this, we use three performance estimation methodologies including combined models of Fama and French (1993) with Treynor and Mazuy (1966), Henriksson and Merton (1981), and Goetzmann, Ingersoll, and Ivkovic (2000). I also employ pooled regression for each year, non-parametric analysis, and dummy variable added regression for robustness test. The results of analyses using various methodologies to estimate performance show that the fund managers' timing skills of fund managers strikingly improve after structural change in the fund market. For one thing, only 2% of equity funds are observed to hold statistically significant timing ability during the pre-structural change periods, while more than 30% of funds display timing ability during the post-structural change periods. I also provide evidence that fund managers present substantially different timing ability by investment management company, and that the timing skills of fund managers are much more improved after structural change in funds whose stock holding ratio is higher, total cost is lower, and size is larger (more than 100 billion won) or enormously tiny (less than 5 billion won). Meanwhile, the selectivity skills of fund managers deteriorate after structural change, but the extent of decline is not statistically significant. These results suggest that the investment companies may be able to compose holding stocks and to timely alter stocks by focusing more closely on the market movements especially those related to structural changes of fund market caused by the sale of dollar cost averaging funds. In reality, most dollar cost averaging funds are classified not as aggressive growth funds whose purpose is to achieve the highest capital gain accompanied by high share price volatility, but as value funds that primarily hold stocks that are conceived to be undervalued in price in the relatively long term horizon. This implies that trading strategy on equity funds is more likely to change the longer investment horizon and the lower turnover ratio, enlarging the opportunity of timing ability for fund managers. Another implication of the results of this study is that the impact of a rapidly growing fund market on the entire stock market has augmented since the sale of dollar cost averaging funds. Namely, as major liquidity providers, equity funds lead to entire stock market movement. For instance, the Korea Composite Stock Price Index (KOSPI) had increased for a while after the introduction of the dollar cost averaging funds, although foreign investors' stock investments have reverted to a net selling position. This paper contributes to the existing literature in that the sale of dollar cost averaging funds bringing about tremendous structural changes is assessed as a crucial incident that marks the beginning of a new era in the Korean fund market. In addition, the paper minimizes the various biases caused by sample selection through more systematic selection procedure such as excluding master feed funds within family funds, picking one among multi- class funds, and including funds whose inception date is after June 2000 when new classification system of funds was introduced. Above all, this paper propounds salient implication that future researches associated with funds in Korean market should necessarily ponder over the impact of these structural changes on their results.

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Comparisons of Liquidity Measures in the Korean Stock Market

Cheol-Won Yang

Asian Review of Financial Research :: Vol.25 No.1 pp.37-88

Abstract
Comparisons of Liquidity Measures in the Korean Stock Market ×

The notion of liquidity is widely used in the finance area, such as in the studies of market microstructure and asset pricing. And yet, so many liquidity measures are available with little consensus on which measure is the most appropriate that it is difficult for researchers to decide which one they should adopt for their studies. In the US, Goyenko, Holden and Trzcinka (2009) provide a comprehensive study of liquidity measures. They run horseraces of the widely used proxies of liquidity, plus new proxies they developed against the high-frequency liquidity benchmarks. Lesmond (2005) investigates the liquidity measures of 23 emerging markets using the quarterly bid-ask spread as a benchmark. His study includes the Korean stock market; however, it has a limitation in that the high-frequency measure is not employed as liquidity benchmark. This paper compares various liquidity measures in the Korean stock market to provide a guide for the use of liquidity measures by employing the high-frequency data. The paper runs horseraces of low-frequency liquidity measures derived from daily data against high-frequency liquidity benchmarks from intraday data. At first, I classify the liquidity measures into two categories: spread and price impact measures. Spread measures gauge the direct trading cost while price impact measures the indirect trading cost. Liquidity measures used in the paper are as following: (1) High-frequency spread benchmarks: Quoted spread, Effective spread, Realized spread. (2) Low-frequency spread measures: Roll, Roll2, Gibbs, LOT, Zero, Zero2, Liu, Turnover, Amihud, Pastor and Stambaugh, Amivest, KRX quoted spread. (3) High-frequency price impact benchmarks: Lambda (λ), 5-Minute Price Impact, Static Price Impact. (4) Low-frequency price impact measures: Roll Impact, Roll2 Impact, Gibbs Impact, LOT Impact, Amihud, Pastor and Stambaugh, Amivest. Next, comparisons of liquidity measures are performed on the Korean stock market. The Korean sample is comprised of 271 firms listed in the Korea Exchange for the period from April 1993 to December 2004. Monthly and annual liquidity measures are estimated and compared by using two methodologies: correlation and prediction error analysis. The first correlation metric is the average cross-sectional correlation based on individual firms between the high-frequency benchmarks and the low-frequency liquidity measures. The second correlation metric is the time-series correlation based on an equally-weighted portfolio. The third correlation metric is the pooling correlation based on all month (year)-firm observations. As prediction error metric, the mean bias and the root mean squared error (RMSE) between the benchmark and the liquidity proxy are used. The results from the prediction error are expected to be useful for market efficiency and corporate finance tests, since in these fields the correctly scaled proxy is needed. This paper provides us with important findings about liquidity measures. First, in the comparison of spread measures, the KRX quoted spread, which uses the closing quoted bid-ask spread, has the highest correlations (0.397~0.977) and the smallest prediction errors (mean bias: 0.000~0.007, RMSE: 0.001~0.008) with the high-frequency spread benchmarks. However, this measure has different property with the other low-frequency spread measures because it adopts one observation among high-frequency data rather than proxies spread. Among the spread proxies, Amihud performs the best in correlation analysis (0.12 2~0.943), and LOT in prediction errors analysis (mean bias: -0.002~0.006, RMSE: 0.005~ 0.010). LOT shows the highest accuracy: in summary statistics, the mean of monthly LOT is about 0.8% when the mean of the Quoted and Effective spread is about 1.0%. Moreover, LOT has high time-series correlations with the benchmarks and performs well in the portfolios stratified by the firm size and effective spread. Second, in the comparison of price impact measures, most low-frequency measures, except Pastor and Stambaugh, have high correlation with high-frequency benchmarks. Gibbs Impact and Amihud perform distinguishably well. Pastor and Stambaugh is likely to contain much estimation errors when it is estimated based on individual firms. Also, two robustness checks are performed. First, the sample period is divided into eight sub-periods by using the market index moving averages. Second, comparisons are also done using firms included in the KOSPI200 index. These analyses show the similar results with the previous. The result of a sub-period for 1997. 6~1998. 6, in which Korea experienced the severe financial crisis, shows lower correlations and higher prediction errors than other sub-periods.

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Informational Effect of Inquired Disclosure following Noticeable Stock Price Changes

Jinwoo Park;Myung-Il Park

Asian Review of Financial Research :: Vol.25 No.1 pp.89-121

Abstract
Informational Effect of Inquired Disclosure following Noticeable Stock Price Changes ×

The inquired disclosure is a system operated by the Korea Exchange (KRX) to validate the existence of material information when the price of a listed stock fluctuates substantially. It is different from other timely disclosure since KRX inquires information, and the firm confirms the information inquired by the Exchange whereas in case of other timely disclosure the firm itself mandatorily or voluntarily release information to the investors. According to the efficient market hypothesis, the stock prices react only to new fundamental information. Sometimes, the stock prices exhibit noticeable jump or plunge without any specific public information. In that case, the Exchange inquires of the firm about the reason for the noticeable price changes. In response to the inquiry from the Exchange, the firm usually provides two types of answers such as “nothing unusual” or “something undetermined.” This paper investigates how the demand for inquired disclosure from the Korea Exchange affects the movements of stock price and trading volume for the period of ±20 days surrounding the event. The event date is defined as the day when the Exchange demands the inquired disclosure related to the stock price jump or plunge occurring without any specific public information. Also, this paper investigates the trading patterns of different investors (classified as individual, institutional, and foreign investors) surrounding the day of inquiry. For this purpose this paper examines the cases of the KOSPI-listed firms which are inquired to be disclosed for the explanation of the jump or plunge of stock price for the period from 2005 to 2009. We collected a total of 497 samples which are composed of 436 cases of jump and 61 cases of plunge. Then these samples are divided into four groups depending on price changes and types of firms' answers, such as jump/something undetermined, jump/nothing unusual, plunge/something undetermined, and plunge/nothing unusual. This paper employs typical event study methodology, and computes the abnormal return (AR) and the cumulative abnormal return (CAR) surrounding the event day using the market adjusted return model. The main results and implications drawn from the empirical analysis are as follows. First of all, we find insignificant abnormal return on the day of inquiry followed by stable price movements, suggesting that the demand for inquired disclosure from the Korea Exchange can play an effective role in calming down price jump or plunge. However, we do not find price reversals on the day of inquiry that are expected to exhibit if the past substantial price changes occurring without any specific public information were bubble. In addition, in case of something undetermined we observe 10-day CAR of -6% following the inquiry after plunge and +6% following the inquiry after jump whereas in case of nothing unusual insignificant price changes are observed following the day of inquiry. This result implies that in case of something undetermined stock price continues to reflect new information revealed in the market. Next, in the investigation of long-term stock price movements following the demand for inquired disclosure from the Exchange we find that in the case of plunge the stock prices tend to steadily increase following the day of inquiry. In particular, in case of plunge/nothing unusual the stock prices revert to the past level of stock prices. However, in the case of jump, we do not find any significant patterns of long-term price changes following the inquired disclosure. In this paper we also observe that the trading volume significantly increases during ±5 days surrounding the day of inquired disclosure. This finding suggests that investors are getting more sensitively responsive to the information of the demand for inquired disclosure from the Exchange. Finally, this paper investigates the trading patterns of three different types of investors classified as individuals, institutions, foreigners by observing the ratio of each investors' net buying (selling) position. We find that individual investors are the main driving force behind the stock price jump or plunge as net buyers while the institutions as net sellers. In particular, individual investors take net buying position on the day of inquiry and continue afterwards whereas institutional investors take net selling positions during that period only. On the other hand, foreign investors do not exhibit any notable trading patterns, suggesting that foreign investors do not respond to uncertain information in the Korean stock market. On the whole, this study is to contribute to the academic research in the area of market efficiency and informational effect. In particular, this paper can accelerate the studies on the informational effect of inquired disclosure in the Korean stock market. Also, the evidence of this research is expected to provide useful information to the investors in the stock market who frequently observe substantial price changes occurring without any specific public information. In addition, the empirical results of this study reveal important implication to the policy makers who are interested in the effectiveness of inquired disclosure system.

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Growth Opportunity and Capital Structure of Korean Listed Manufacturing Firms

Sekyung Oh;Woo Sung Kim

Asian Review of Financial Research :: Vol.25 No.1 pp.123-160

Abstract
Growth Opportunity and Capital Structure of Korean Listed Manufacturing Firms ×

In corporate finance literature it is well known that how a firm chooses its capital structure depends on its growth opportunity and profitability among many financial and economic variables. According to Fama and French (2002), both growth opportunity and profitability are the main reasons for financing deficits, and the capital structure decisions by firms are closely related to these two variables. There are many competing finance theories or hypotheses that try to explain the relationships between firm's capital structure and financial and economic variables such as trade-off theory, agency theory, simple pecking order theory, complex pecking order theory, market timing theory and hold-up hypothesis. In this paper, we consider all of the above capital structure theories and hypotheses and test which theories or hypotheses are confirmed and which are not for Korean listed manufacturing companies. In particular, we examine how growth opportunity faced by Korean listed manufacturing firms may affect their choice of capital structure and which capital structure theory best explains financial decision making behaviors of Korean listed manufacturing firms. We extract our data using KISVALUE supplied by National Information and Credit Evaluation (NICE). The sample of our paper consists of 601 Korean manufacturing companies listed both on Korean Stock Exchange (KSE) and on Kosdaq from the period of 2000 to 2010. Based on the sample, we performed panel data analyses. The empirical implications are as follows: First, growth opportunity measured by market-to-book value ratio has a statistically significant positive relationship with book leverage, which is consistent with the simple pecking order theory. However, growth opportunity has a statistically significant negative relationship with market leverage, which is in line with the trade-off theory and/or the complex pecking order theory. According to Fama and French (2002), in the complex pecking order theory, firms are concerned with future as well as current financing costs. Balancing current and future costs, it is possible that firms with large growth opportunities maintain low-risk debt capacity to avoid either foregoing future investments or financing them with new risky securities. Second, we divide the sample into three groups according to the magnitude of their growth opportunity and find the same relationship for all groups as before, which is different from prior studies (Chen and Zhao, 2006; Serrasqueiro and Nunes, 2010), but that the highest growth opportunity firms are least sensitive to debt ratio compared to their lower growth opportunity peers. Moreover, our result seems to suggest that Korean listed manufacturing companies with the highest growth opportunity recognize their financial distress risk higher in the respect that they show low profitability compared to the firms of other countries. In general, it is more effective for the high growth opportunity firms to use more debt financing because they show high profitability and low borrowing cost on average. Third, the simple pecking order theory tested by financing deficit variable is not confirmed because the relationship between debt ratio and financing deficit is significantly positive only for the lowest growth opportunity firms (the other groups have significantly negative coefficients). Furthermore, the simple pecking order theory tested by profitability variable is confirmed because both market and book leverage shows significantly negative relations with profitability. The trade-off theory tested by asset tangibility and firm size variables is confirmed because both market and book leverage shows statistically significant positive relations with them. Also, the trade-off theory tested by bigshare dummy variable is confirmed because it shows a significantly negative relationship with debt ratio, which suggests that the higher the major shareholders' ownership firms have, the lower the firms' debt ratios are. Fourth, to test whether the market timing theory is confirmed for Korean listed manufacturing firms, we look at the relationship between debt ratio and external finance weighted average market-to-book ratio. The result depends on whether we use market leverage or book leverage as a dependent variable. We find a significantly positive relationship for book leverage and a significantly negative relationship for market leverage, which suggests that the market timing theory holds only for market leverage in case of Korean listed manufacturing firms. Finally, growth opportunity has a statistically significant negative relationship with bank loan, reinforcing the hold-up hypothesis which claims that firms with high growth opportunity are concerned that their firm-specific information may be monopolized and utilized by banks. According to the grouping analysis based on the magnitude of growth opportunity, the highest growth opportunity firms show a significantly negative relationship between growth opportunity and bank loan, but the lowest growth opportunity firms show a statistically insignificant relationship between them. This seems to suggest that the more growth opportunity firms have, the less preferable are bank loans for them.

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