Investor Psychology and Security Market Under- and Overreactions

Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/73431/1/0022-1082.00077.pd

Executive Compensation, Firm Performance and Chaebols in Korea: Evidence from New Panel Data

This paper provides the first rigorous econometric estimates on the pay-performance relations for executives of Korean firms with and without Chaebol affiliation. To do so, we have assembled for the first time panel data (that provide information not only on executive compensation and firm performance but also on Chaebol affiliation) for 246 firms that were included in KOSPI200 for at least two consecutive years from 1998 to 2001. Contrary to a popular belief that Korean corporate governance and the structure of Korean executive compensation is considerably different from elsewhere in the West, we find that cash compensation of Korean executives is statistically significantly related to stock market performance and that the magnitude of the sensitivity of pay to stock market performance is comparable to the U.S. and Japan. Perhaps even more importantly, further analysis reveals for the first time that such overall significant executive pay-performance link is driven by non-Chaebol firms and that no such link exists for Chaebol firms. The evidence is consistent with the recent literature on the nature of Chaebols in Korea and the current corporate governance reform efforts in Korea that are aimed mostly at Chaebol firms

Stock Repurchase in Korea: Market Reactions and Operating Performance

This study examines the motive for stock repurchase. We examine four hypotheses — undervaluation, signaling, free cash flow, and optimal leverage hypotheses — using both short-run and long-run market reactions. We find that the undervaluation hypothesis is most consistent with both short-run and long-run tests. Improvement in operating performance following repurchase suggests the signaling hypothesis. However, the signaling hypothesis is supported only in the long-run test, not the short-run test, suggesting that market underreaction exists to the signaling initially. Of the control variables, the target purchase ratio and ownership by the largest shareholders are found significant, suggesting that the magnitude of repurchase and the ownership increase motive by the largest shareholders are also important factors that explain the repurchase.Stock repurchase, undervaluation, signaling, free cash flow

Conflict of Interest or Information Sharing? Evidence from Affiliated Analyst Performance in Korea*

This paper examines the accuracy and optimism of forecasts made by affiliated analysts compared to those made by independent analysts. Using Korean chaebol firms, we test the information-sharing hypothesis and the conflict of interest hypothesis. Our results show that the forecasts made by the affiliated analysts are less accurate and more optimistic than those made by the independent analysts. This finding is inconsistent with the information-sharing hypothesis but supports the conflict of interest hypothesis. The results also indicate that the forecast accuracy of affiliated analysts is not related to the internal sales transaction ratio or the idiosyncratic information of the group firms. We also find that the forecast accuracy of affiliated analysts increased after Regulation Fair Disclosure came into effect in 2002 in Korea, which finding is in disagreement with the information-sharing hypothesis. Our results reveal that the forecast inaccuracy and optimistic bias of the affiliated analysts are not directly related to the individual ownership relationship of the affiliated group firms with the forecasting firm. Our results provide further evidence of analysts' conflict of interest that arises from earnings-related intragroup propping behavior.close

Internal funds allocation and the ownership structure: Evidence from Korean business groups. Review of Quantitative Finance and Accounting

Abstract We examine whether the dispersed asset-weighted ownership structure of a controlling shareholder across member firms within a group (chaebol) have significant explanatory power on the adjusted investment ratio (our measure of the transfer) in the period of 1998 to 2002. As an indirect transfer measure, we use the adjusted investment ratio of Rajan, Servaes, and Zingales (2000). The assetweighted largest shareholder ownership and inside ownership are our measure of cash flow ownership holdings of controlling shareholders. The results suggest that the ownership structure distorts the allocation of internal funds within chaebols in the direction of making the controlling shareholders more powerful and profitable

Trading behavior before the public release of analysts' reports

This paper investigates the existence of prerelease information leakage of analyst reports to institution investors. Analysts are likely to provide tips about their reports to institutional investors in order to raise commission revenue. Some previous studies, such as Irvine, Lipson and Puckett (2007) reveal the information leakage of analysts’ reports. However, it is difficult to show the direct link between information contained in analysts’ reports and the prerelease elevation of institutional trading. To determine a direct link between information leakage and institutional trading, this study investigates different trading behaviors between clients and non-clients. The client is defined as the institution trading through the brokerage firm where the recommending analyst is employed. If there is information leakage, the clients’ prerelease trading information is expected to increase more and earlier than the non-clients’. Also, the trading behavior of clients would be different depending on the characteristics of analysts’ forecasts. The overall findings of this study support the information leakage argument in that clients trading behavior differs from that of non-clients before the public release of analysts’ reports

The Difference Between Measuring Internal Funds Allocations in Groups and in Diversified Firms

Dependent variables used by Kim, Jung and Kim (2005) to assess the effect of the ownership structure of Korean chaebols on internal funds allocations are a priori misspecified in the context of their research, as they were designed to be applied when studying diversified firms and not groups consisting of legally independent entities. The conditions under which this misspecification has no effect on their conclusions are discussed. Re-analyzing their data with a more appropriate internal funds allocation variable leaves their conclusion on the presence of tunnelling effects intact, though it paints a partly different picture of internal allocations as such.Internal capital markets, groups, funds transfers