Korea Stock Exchange Research Articles

An Exploration of Dynamical Relationships between Macroeconomic Variables and Stock Prices in Korea

This paper examines short-run and long-run dynamic relationships between selected macroeconomic variables and stock prices in the Korea Stock Exchange. The data is restricted to the period for which monthly data are available from January 1986 to October 2016 (370 observations) retrieved from the Economic Statistics System database sponsored by the Bank of Korea. The study employs unit root test, cointegration test, vector error correction estimates, impulse response test, and structural break test. The results of the Johansen cointegration test indicate at least three cointegrating equations exist at the 0.05 level in the model, confirming that there is a long-run equilibrium relationship between stock prices and macroeconomic variables in Korea. The results of vector error correction model (VECM) estimates indicate that money supply and short-term interest rate are not related to stock prices in the short-run. However, exchange rate is positively related to stock prices while the industrial production index and inflation are negatively related to stock prices in the short-run. Furthermore, the VECM estimates indicate that the external shock, such as regional and global financial crisis shocks, neither affects changes in the endogenous variables nor causes instability in the cointegrating vector. This study finds that the endogenous variables are determined by their own dynamics in the model.

Corporate Social Responsibility, Ownership Structure, and Firm Value: Evidence from Korea

This study examines the relationship between corporate social responsibility (CSR) and firm value in the context of ownership structure. Specifically, our study explores whether large shareholder and foreign shareholder ownership play an important role in the CSR–firm value relationship. Using a sample of 48 firms listed on the Korea Stock Exchange (KSE) between 2010 and 2014, we find that CSR is positively associated with firm value. We further find that the relationship between CSR and firm value is weaker in firms with high large shareholder ownership than in firms with low large shareholder ownership. However, we find no evidence of the effect of foreign ownership on the relationship between CSR and firm value. This study sheds light on the importance of ownership structure in the relationship between CSR and firm value, suggesting significant implications for academics, practitioners, and policymakers. We contribute to the existing literature by providing empirical evidence on the effect of ownership structure on the CSR–firm value relationship. Policymakers may consider these results in implementing their policies that can enhance CSR activities.

A study on the earnings response coefficient (ERC) of socially responsible firms

PurposeThe purpose of the paper is to examine the corporate social responsibility (CSR) – earnings response coefficient (ERC) relation in the code-law tradition and the early stage of CSR practice to fill the research gap in the literature on CSR–ERC relation.Design/methodology/approachThe authors use an association framework for the study. They use the firms listed on Korea Stock Exchange because Korea is classified as a code-law country and most of firms in Korea are in the early stages of CSR development, and Korean samples are considered credible and stable because of the effective financial reforms initiated by Korean government in the late 1990s. The authors collected data from the two data sources: KisValue and Korea Corporate Governance Service.FindingsThe authors find the following. First, CSR is negatively associated with ERC, which indicates that the ability of earnings to capture CSR implication is lower under the circumstances of the code-law and the early stage of CSR development. Second, political sensitivity (business group effect) is positively (negatively) associated with CSR–ERC relation, which means that the politically noticeable CSR concerns strengthen the CSR–ERC relation, and the inclusion of a firm in a business group weakens the CSR–ERC relation.Research limitations/implicationsThe paper derives theoretical implications on the quality of earnings reflecting CSR activities, provides practical implications to the investors who target international capital markets and is expected to help broaden the understanding of CSR–ERC relations in international capital markets.Practical implicationsThe paper provides practical implications to the investors who target international capital markets. Regarding the interpretation of accounting earnings that contain information on CSR activities, the legal origin and the CSR development stages are considered as key factors. Specifically, in the code-law and the early CSR environment, the potential benefits of CSR activities tend to be evaluated optimistically and reflected aggressively in reported earnings. Thus, if investors are in a similar international investment environment, they may need to recalibrate estimates in their decision model with additional CSR information from non-financial sources (e.g. sustainability reports).Originality/valueThe paper is based on the international institutional theory and the discussion of CSR development stages. The international institutional theory states that the legal origin is one of the factors that can help explain the differential aggressiveness of reported earnings by country. In addition, the discussion of CSR stages argues that the CSR practices can be differentially implemented by CSR stages. The authors try to fill the gap in the existing literature by conducting an empirical study based on data from Korea Stock Exchange.

Is individual trading priced in stocks?

Individuals have long been suspected of being noise traders. We seek empirical evidence of this and suggest the individual trading weight as a proxy for noise trader risk. Based on a common stock sample of non-financial firms listed on the Korea Stock Exchange, we find that returns are higher for firms that are more densely traded by individual investors controlling for Fama and French’s (1993) three factors of market, firm size and valuation, and Carhart’s (1997) momentum factor. Furthermore, the excess return of portfolios sorted by the proportion of individual traders is an influential risk characteristic even under bull and bear market conditions. Additionally, tests based on average correlations and principal component analyses reveal that individuals generate systematic noise in the Korean stock market. Lastly, on a cross-country check, the individual trading factor is shown to affect stock returns in Taiwan as well.

Do foreign investors mitigate anchoring bias in stock market? Evidence based on post-earnings announcement drift

In this paper, we examine the role of foreign investors in the anchoring bias of stock markets. While the existing behavioral finance literature is mostly based on established capital markets like U.S. and U.K., this paper focuses on emerging economy in which foreign investors are important stockholders. Using a sample of common stocks listed on the Korea Stock Exchange between 2001 and 2014, we document the following empirical results. First, the nearness of current price to the 52-week high is positively related to the magnitude of post-earnings announcement drift (PEAD). This indicates that investors are hesitant to revise their beliefs upward (downward) when positive (negative) surprises arrive if the price is already near (far below) its 52-week high, on average. More important, the positive relation between the price proximity to the 52-week high and PEAD disappears for stocks with high level of foreign investor ownership, suggesting that anchoring effect of stocks' 52-week high prices is mitigated by foreign investors. Also, dedicated foreign institutions play an important role in mitigating the extent of PEAD due to anchoring bias. These findings add new evidence to the literature that sophisticated foreign investors reduce market anomaly because they are less subject to cognitive bias such as anchoring on 52-week high stock price in forming earnings expectations.

A Comparative Study on the Information Effect of Stock Lending and Borrowing and Short Selling between the Korea Stock Exchange and the New Stock Exchange

The purpose of this study is to compare the information effect of Stock Lending and Borrowing (SLB) and short selling between the Korea Stock Exchange (KRX) and the New York Stock Exchange (NYSE). While most previous studies analyzed the information effect with a focus on short selling, this study links short selling to SLB and examines how SLB and short selling affect stock prices. Using the data of 40 stocks with the most active records of SLB and short selling from each exchange, we perform a regression analysis to examine the information effect. We find that in the KRX, SLB has a positive effect on short selling and short selling has a negative effect on stock prices. However, in the NYSE, short selling has a significant positive effect on stock prices. This is due to the differences in policies concerning public posting of short selling data. We also find that the effect of volatility on stock prices and the effect of short selling on volatility are all significantly negative in both exchanges. That is, short selling reduces market volatility and thus keeps the market from overheating. Furthermore, the effects are greater during the periods when SLB and short selling are more concentrated.

Changes in the value relevance of accounting information before and after the adoption of K-IFRS: evidence from Korea

This paper aims to investigate the value relevance change before and after the mandatory adoption of Korea's international financial reporting standards (K-IFRS) in the listed Korean financial markets. This paper tests the value relevance change by dividing sample data into the periods before (2008-2010) and after (2011-2013) K-IFRS adoption. This study categorises sample data into several subgroups by firm size (large versus small and medium) and applicable financial market (KOSPI versus the KOSDAQ) for revealing further evidence of the value relevance change in Korean companies. The empirical results in this paper suggest that the value relevance of book value, accounting earnings, operating income, cash flows, and operating cash flows significantly changed before and after K-IFRS adoption. This paper's evidence suggests the possibility of a new debate regarding the primary value relevant factor before and after K-IFRS adoption among the companies listed on the Korea Stock Exchange.

Changes in the value relevance of accounting information before and after the adoption of K-IFRS: evidence from Korea

This paper aims to investigate the value relevance change before and after the mandatory adoption of Korea's international financial reporting standards (K-IFRS) in the listed Korean financial markets. This paper tests the value relevance change by dividing sample data into the periods before (2008-2010) and after (2011-2013) K-IFRS adoption. This study categorises sample data into several subgroups by firm size (large versus small and medium) and applicable financial market (KOSPI versus the KOSDAQ) for revealing further evidence of the value relevance change in Korean companies. The empirical results in this paper suggest that the value relevance of book value, accounting earnings, operating income, cash flows, and operating cash flows significantly changed before and after K-IFRS adoption. This paper's evidence suggests the possibility of a new debate regarding the primary value relevant factor before and after K-IFRS adoption among the companies listed on the Korea Stock Exchange.

Charateristics of Stocks That Frequentley Hit Price Limits: Empirical Evidence from Japan

This paper examines the characteristics of stocks that hit the limits listed in the Tokyo Stock Exchange. Most of studies on price limit hits are carried out on stock markets that apply tight price limits rules such as the Taiwan Stock Exchange, the Stock Exchange of Thailand and Korea Stock Exchange. A market that applies tighter price limit rules experiences many limit-hit occurrences; this makes analysis simpler because the analysis can use a smaller number of stocks and a reasonable sample period. Therefore, this study contributes to the literature by examining the Tokyo Stock Exchange, which applies wide price limit rules. We analyzed the characteristics of stocks that hit the limits more frequently, stocks that hit the upper limits and stocks that hit the lower limits. Daily data were collected for all stocks listed in the Tokyo Stock Exchange from 2003 to 2007. The data were downloaded from the Datastream and the Tokyo Stock Exchange website. Three binary logistic regression models were applied. The first model tested the characteristics of stocks that hit upper and lower limits more frequently. The second model was for the characteristics of stocks that hit the upper limits, and the final model was for the characteristics of stocks that hit the lower limits. The results show that stocks that hit the upper limits tend to have a smaller systematic risk, while stocks that hit the lower limit tend to have a high systematic risk. This indicates that lower limit hits are due mostly to market-driven downward movements while upper limit hits are more likely related to company-driven upward movements. This means that price limits rules were effective in Japan in curbing undesired fluctuations of stock prices and in protecting the market from crashes. The results of the three models show that both upper and lower limit hits and upper and lower limit hits individually vary from year to year throughout the sample period. In general, high market value stocks, high volatility stocks, high residual risk stocks and low systematic risk stocks tend to hit the limits more frequently. The results also show that high market value stocks, high volatility stocks, high residual risk stocks, low liquidity stocks and low systematic risk stocks tend to hit the upper limits. Meanwhile, high market value stocks, high volatility stocks, high residual risk stocks, low liquidity stocks and high systematic risk stocks tend to hit the lower limits. Our study can be viewed as providing complementary evidence. By documenting some regularity with which price limit hit events occur, we offer new considerations to the current discussions surrounding price limit mechanisms. In spite of the negative effects shown by scholarly researchers, the popularity of price limits among both practitioners and stock exchange officials may be partially justified through our empirical evidence.

Mandatory Adoption Of IFRS And Earnings Transparency In Korea

We investigate the relation between mandatory adoption of IFRS (International Financial Reporting Standards) and earnings transparency in Korea. We define transparency of earnings as how well it explains a firm value. Financial reporting mitigates information risks of the firm by lessening information asymmetry between insiders and outsiders of a firm. If accounting information produced after adopting IFRS better explains a firm value, then, it will reduce information asymmetry and information risks of the firm, resulting in enhancement of earnings transparency. We measure earnings transparency based on Barth, Konchitchki, and Landsman et al. (2013) and Cheng and Subramanyam (2008). 
 The sample is 2,276 which are listed on Korea stock exchange over 2008-2014. The empirical result shows adopting IFRS is significantly positive with earnings transparency, which means it mitigates information asymmetry, enhancing earnings transparency in Korea.
 Our study is distinguished from prior studies because we empirically examine influence of adopting IFRS on earnings transparency of Korea. Our result implies adopting IFRS contributes to higher earnings transparency which helps market participants make decisions.

Convertible Bond Issue Announcement Effect: Investment Opportunities and Market Reaction Perspective

This study examines the announcement effect of convertible bond issue in Korea where the issuance of convertible bonds is increasing rapidly. We find that abnormal stock returns are positive for the firms with unusual high trading volume using a sample of listed firms in Korea Stock Exchange during 2000-2015. Moreover, we show that unusual high volume around convertibles issue announcement has positive correlation with capital expenditure when firm has valuable investment opportunities. Therefore, more favorable announcement returns are driven by capital expenditure decisions and the quality of investment opportunities. In the same sense, the impact of cash flow also depends on the issuer’s quality of investment opportunities. Additionally, we confirm that issuing convertibles has negative signaling effect that stock of issuer is overvalued, and the issuer’s volatility has negative impact around announcement date.

Congruence within the Top Management: How “Old Boy Network” Affects Executive Appointment and Performance

This paper examines the determinants and the consequences of congruence between the CEO and other executives focusing on the role of previously-built school and regional ties. Using a sample of 2,129 firm-years from 2003 to 2006 for all firms listed on the Korea Stock Exchange, we find that executives are more likely to share the same school or regional background as the CEO when the firm is small, foreign ownership is low, or the CEO is a family member of the controlling shareholder. We also find that such congruence increases firm value when the firm is young and foreign ownership is large, but decreases firm value in firms tightly controlled by family member CEOs through large voting rights. These results suggest that congruence within the top management may facilitate communication when the nature of information being transmitted is “soft”, but may aggravate agency problems when CEOs are entrenched.

Audit Quality And Accrual Quality: Do Big 4 Auditors Indeed Enhance Accrual Quality Of ‘Powerful’ Clients?

External auditors are considered ‘watchdogs’ which closely monitor corporate financial reporting process and provide guidelines for investors and financial institutions. However, recent accounting scandals in Korea indicate that external auditors may cater their audit reports to their clients’ needs. Based on a sample of listed companies on the Korea Stock Exchange from 2001 to 2010, this study finds the evidence consistent with such conjecture. First, large business conglomerates in Korea (so called ‘chaebols’) audited by Big 4 have lower accrual quality than the others, indicating that Big 4 auditors may not serve as watchdogs to enhance accrual quality of ‘powerful’ clients. However, powerful clients who pay greater non-audit service fees to Big 4 auditors have higher accrual quality than the others. This result suggests that non-audit services provided by Big 4 may not necessarily harm the quality of accounting information, contrary to the traditional view in the literature.

Financial Performance of Socially Responsible Indices

Abstract This article analyzes rate-of-return and risk related to investments in socially responsible and conventional country indices. The socially responsible indices are the DJSI Korea, DJSI US and Respect Index, and the corresponding conventional country indices are the Korea Stock Exchange Composite KOSPI, Dow Jones Industrial Average and WIG20TR. We conclude that investing in the analyzed SRI indices do not yield systematically better results than investing in the respective conventional indices, both in terms of neoclassical risk and return rate. This finding suggest that socially responsible investing should be assessed in terms of behavioral economics related to the psycho-social features of investors, rather than to simplified rational choices (based only on the risk and return rate analysis) that neoclassical economics assumes.

The Effect Of Accruals Quality On The Association Between Voluntary Disclosure And Information Asymmetry In Korea

Using data on the firms' voluntary disclosures from the Korea Stock Exchange from 2011 to 2014, we first empirically examine the association between voluntary disclosure and information asymmetry and then investigate the extent to which this association is affected by accruals quality since Korea adopted International Financial Reporting Standards (IFRS) in 2011. We use Comprix et al. (2011) and Shin and Park (2014)'s measures of information asymmetry. They are daily stock return volatility (VOLA) and trading volume turnover (VOL). We use the Dechow et al.'s (1995) revised Jones model and the Kothari et al.'s (2005) performance matched discretionary accrual model to measure the discretionary accruals. The absolute values of discretionay accruals are used as proxies for accruals quality. Final research samples with voluntary disclosure for this study are 1,226 (firms-years) companies. The research findings generally support our hypotheses. First, the relation between voluntary disclosure and information asymmetry is statistically and significantly positive as we have expected. The Korean companies with high voluntary disclosure would experience higher daily stock return volatility and less trading volume, which implies that companies tend to disclose biased information to the outside, which is consistent with prior studies in Korea. Second, the accruals quality (moderating variable) on the relation between voluntary disclosure and information asymmetry is statistically and significantly negative. Thus, we can conclude that when accruals quality is high, more voluntary disclosure decreases information asymmetry. These findings imply that accruals quality works as a mechanism in reducing the negative effect of voluntary disclosure on information asymmetry after the adoption of IFRS in Korea. The limitation of this study is such that we might not have considered other omitted variables and other proxies for the accruals quality, voluntary disclosure, and information asymmetry.

The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From Korea

The purpose of this paper is to verify external auditors’ behavior toward corporate tax avoidance (hereafter ‘CTA’) via audit efforts. In particular, this study examines the effect of CTA on actual audit hours and abnormal audit hours (i.e., auditor perception of corporate tax avoidance as a risk factor). For the successful CTA, the managers have incentives to render corporate information environments more complex and opaque, and as a result exacerbate information asymmetries. And some real-world cases of CTA suggest that it is closely related to the principal-agent regime. These negative aspects of CTA may increase inherent and control risk of audit risks. Considering the monitoring role of external auditing, the auditors may respond to increased inherent and control risks which are consequent to CTA. And the auditor responses are expected to reflect directly in audit hours. For this empirical question, this paper used 2,588 firm-year observations from Korea stock exchange market in the period 2001-2010. We found that in response to increased audit risk from CTA, auditors increased the number of actual audit hours or devoted more audit hours than normal to achieve a given level of audit risk. This study contributes to the literature and auditing practices by extending the auditing and tax literature on the examination of auditor behavior toward CTA and by implying the firms’ CTA behavior is one of the audit risk factors that affect audit planning, respectively.

Credit Rating and Monetary Policy Transmission to Equity Markets: Evidence from the Emerging Market

This study empirically estimates credit channel of the monetary policy and corporate stock return using daily stock return data including the sample with non-financial firms listed in Korea stock exchange (KOSPI). Empirical results support that changes in the basis rate turn out to increase equity returns in case of the firms with higher credit rating compared to the previous year. The estimation results confirm the conjecture that monetary policy has a significant impact on stock market through the channel of changes in credit rating.

An Empirical Study on Price and Return of Commodity ETFs in Korea

This study analyses empirically the Granger causality between commodity ETFs listed in KRX (Korea Stock Exchange) and the price determinants of the underlying commodities as well as the KOSPI200 index and the underlying indices, and compares the performance of four commodity ETFs : gold futures, oil futures, soybean futures and the copper price. The main findings are as follows : First, the commodity ETFs tracking gold futures, oil futures and soybean futures prices in the sample from the inception to June 2015 were not directly related to the price determinants of the underlying commodities except for the copper ETF which was affected by the oil price as one of the price determinants of copper. In addition, all four ETFs were not related to the KOSPI200 index while they were affected by the underlying indices. Second, the soybean futures ETF outperformed the KOSPI200 index in terms of the cumulative returns and the oil futures ETF recorded the worst performance in terms of the cumulative returns and IR (information ratio). Third, the average tracking error of each ETF except for the oil futures ETF showed a positive value and the price of each ETF except for the soybean futures ETF has been undervalued compared to its net asset value. From the above findings, we can infer that investors in the copper ETF should closely watch the movement of the oil price to enhance the return and investors in the commodity ETFs should first consider agriculture-related ETFs rather than oil-related ETFs considering the price volatility. In addition, the inverse ETFs for copper and agriculture-related products should be introduced following the oil and gold futures inverse ETFs to protect against negative returns in a declining period of commodity prices.

Effects Of Firm Uncertainty On Association R&D Expenditure And Firm Performance: Evidence From Korea

R&D expenditures not only improve competitiveness but also develop future growth engines. Previous studies have been conducted in relation to the relationships between R&D expenditures and individual corporate characteristics. We examine differences in the effects of firms’ R&D expenditures on firm performance (earnings persistence, earnings growth, firm value) among the firms’ uncertainty levels. In this study, 9,767 firm-year observations that settle their account end December listed on the Korea Stock Exchange (KSE) from 2002 to 2011 were empirically analyzed. The empirical findings of the study are as follows. First, R&D expenditures of firms with higher uncertainty levels had larger effects on earnings persistence than those of firms with lower uncertainty levels. Second, R&D expenditures of firms with higher uncertainty levels had larger effects on earnings growth than those of firms with lower uncertainty levels. Finally, the R&D expenditures of firms with higher uncertainty levels had larger effects on firm value than those of firms with lower uncertainty levels. Given these results. Both uncertainty and R&D expenditures can be regarded as being determined in the long term. We contribute to existing research in three main respects. First, reflecting firms’ uncertainty levels when analyzing the effects of R&D expenditures on firm performance (earnings persistence, earnings growth, firm value) is essential. Second, the characteristics of firms’ accounting and financial characteristics should be considered when determining R&D expenditures. Third, the fact that R&D expenditures affect firm performance according to firms’ uncertainty levels is helpful when managers make decisions on R&D expenditures.

Corporate Performance and CEO Turnover in Korea: A Comparative Analysis of Accounting and Market-based Performance Measures

This study empirically examines the influence of firm performance on CEO turnover using data of all listed compa-nies on the Korea Stock Exchange,...