Why do Fund Managers Increase the Lottery-Like Characteristics of the Fund?

We investigate why fund managers invest in lottery-like stocks and whether the behavior that holds more lottery-like stocks affects performance. First, mutual funds that hold more lottery stocks may attract more fund flows. Our results support the theory that fund managers invest more in lottery-like stocks to reflect investors' preferences for extreme payoffs. Second, the level of lottery-like characteristics of mutual funds does not predict managers’ skill and performance. Therefore, fund managers holding more lottery stocks is not a result of managers’ skills. Third, lottery-like characteristics of mutual funds do not significantly affect performance in specific reporting periods (e.g., year-end or quarter-end). Based on this result, we conclude that fund managers do not invest more in lottery stocks to advance their career.

The Effect of Managerial Share Pledges on the Cost of Debt

We examines whether share pledges by controlling shareholders influence a firm’s cost of debt. We also investigate whether the relationship between share pledges and the cost of debt stems from the managerial risk-taking incentives or pursuing the private benefits of controlling shareholders. We make three major findings. First, we find the cost of debt is higher in firms with share pledges than in firms without share pledges. Furthermore, we identify a positive relationship between the cost of debt and the level of share pledges. Second, we find that there is no increased corporate financial leverage or investment activities in firms with share pledges. Finally, our empirical evidence demonstrates that the positive relationship between share pledges and cost of debt is more pronounced for lower foreign institutional investor stakes or higher controlling shareholders ownership. Overall, the results indicate that share pledges by controlling shareholders negatively affect the cost of debt. However, the effect of share pledges on the cost of debt is differently influenced by a firm’s ownership structure. Our findings suggest that share pledges induce stockholder-bondholder conflict, and the bondholder requires more risk premium due to the decrease of firm value.

Comparing the Performance and Management Style of Retirement Pension Funds before and after the Private Pension Activation Plan

We analyzed and compared the performance and management style of retirement pension funds before and after the private pension activation plan (PPAP). First, we found that retirement-pension funds showed better performance than public funds before the PPAP. However, after the PPAP, the retirement-pension market size increased and the difference in performance disappeared. Second, we found that the difference between top and bottom performance group in the retirement pension fund becomes more significant after the PPAP. Third, we found that various investment strategies such as small-medium size stock investment and sector investment are offered in the retirement-pension fund only to result in the inferior performance. Finally, when we compared the management style, the retirement-pension funds showed a smaller value factor compared to public funds for the period after the PPAP. Therefore, we argue that the fund selection has become a more significant factor in determining the retirement fund performance after the PPAP. However, considering that the average retirement-pension holders’ financial knowledge is rather low, the expansion of fund choices may adversely affect the pension holder’s performance. Therefore, a retirement-pension provider’s role as fund selection authority has become more critical, and it is necessary to establish an institutional device that can manage, supervise, and monitor their activities.

The Impact of Relationship Lending on Bank Loan Process for Korean SMEs

We investigate the effects of the bank-firm relationships on the decision making process regarding loan application, loan approval, and loan interest rate. To do this, we use data from 2016, and 2017 Surveys of Korea Small Business Finance conducted by Industrial Bank of Korea. We found that a more intense bank-firm relationship increases the likelihood of loan approval. Also, SMEs borrowing from lower number of banks and with more concentrated loans in main bank seem to obtain credit from main bank at lower interest rate than others. But applying for a loan is not related to the bank-firm relationship. This findings suggest that a close bank-firm relationship can reduce information asymmetry problem and alleviate SMEs’ credit constraint. Also bank-firm relationships seem to be important in determining the loan interest rate. As a relsult, our findings support that relationship lending has a beneficial effect on the supply side of the Korean SME credit market.

Competition in the Outsourced Chief Investment Officer Market: A Game Theory Approach

This study analyzes the competition in the outsourced chief investment officer (OCIO) market by utilizing a game-theory approach of multidimensional auctions, which is theoretically identical to the procurement auction system of OCIO selection. Depending on how the OCIO manages the fund, we analyze auctions using two distinct cases. In the first case, the OCIO operates a designated organization for each fund. This case leads to the conclusion that it is difficult for small funds to use OCIO services because of the high operational costs. In the second case, the OCIO manages multiple funds collectively, enabling even small funds to use OCIO services. Korea’s OCIO market currently operates according to the premise of the first case, meaning that small private funds are not likely to use the service even if a fund-type retirement pension is introduced. Thus, our conclusion implies that in the current OCIO structure, it is difficult for the Korean OCIO market to grow significantly. Policies and institutional supplementation are required.

Spillover Effects of Analyst Coverage on IPO Firms

This study investigates the effect of analysts’ recommendations and earnings forecasts for newly listed firms in the same industry. IPO underpricing is significantly lower as the number of firms whose investment recommendations are upgraded increases, supporting the contagion effect hypothesis that a high affinity for the industry has a positive effect on the IPO offer price. However, as the number of listed firms with higher earnings forecasts increases, IPO underpricing is higher, which supports the competitive effect hypothesis that the profit growth of competitors negatively affects IPO firms’ competitiveness. The effects vary depending on the competitive positions of both listed firms and IPO firms within the industry. The results also show that in industries with high concentration (i.e. low competition) , analyst information on listed firms has a greater contagion effect, while the competition effect hypothesis that better earnings forecasts for rival firms negatively affect IPO firms’ competitive position is not supported. This study contributes to the literature by analyzing the information spillover effect of analyst coverage in the IPO market by showing that the effects vary depending on the firms’ competitive positions as well as industry competition.

A Study of the Performance of Option Strategy Benchmark Index in Global Option Markets

While most previous studies have analyzed the performance of the Option Strategy Benchmark Index (SBI) in a specific market such as S&P500 and KOSPI200, this study comprehensively investigates the performance of the option SBIs in nine global options markets in Europe, Asia, and Oceania. In the empirical analysis using the sample data from September 2008 to April 2019, the main results of this study are as follows. First, most of the option SBIs generally provide better performance than the simple buy-and-hold strategy, which is mainly due to a reduction in risk rather than improvement in returns. Second, the option SBIs based on straddle or protective put, one of the most popular option trading strategies, perform poorly in almost all markets, whereas the option SBIs based on covered call or (cash) covered put show relatively good performance. Finally, there is no significant difference in the performance of the option SBIs between markets in the same region or those with a similar level of development. However, we found significant differences in the performance of the option SBIs between Europe and Asia and developed and emerging markets.

Changes in Market Response to Stock Repurchases during the COVID-19 Crisis

This study analyzed the impact of COVID-19, which, in 2020, globally increased uncertainty about the stock repurchase of South Korean listed companies. The results suggest that the market reaction to stock repurchases during the COVID-19 period was significantly subdued. In particular, the market reaction to KOSPI companies, on stock repurchase, was positive, while it was negative in the case of KOSDAQ companies. It has also been reported that the market ranks lower on the reliability of the signal after the onset of COVID-19. This means that if a company discloses a stock repurchase in a situation where the value of the market as a whole has declined, it cannot be accepted as an undervalued signal. Furthermore, it was revealed that the market responded more positively to the announcement of repurchases by companies that had actively managed shareholder wealth by repeatedly making stock repurchases before COVID-19. These results suggest that companies should always be aware of this, as the market response to stock repurchases in market shockers such as COVID-19 is weaker. Additionally, managers can manage their stock prices more effectively through stock repurchases during market shockers if they consistently manage their stock prices through stock repurchases when companies are undervalued.

Is There an Issuance Premium for SRI Bonds?: Evidence from the Periods Before and After the COVID-19 Outbreak

This study empirically examines whether there are any issuance premia for Socially Responsible Investment (SRI) bonds, using the data from the South Korean bond market from May 2018 to December 2020. We classify SRI bonds into three types: green, social, and sustainability. We divide the sample period into pre-COVID-19 and post-COVID-19 to understand how the pandemic has impacted the pricing of SRI bonds. We employ two empirical approaches: a matching sample analysis and a regression analysis that controls various bond and market characteristics. We find the following. First, significant issuance premia of at least 8bp existed for our sample of social bonds. However, we do not find any evidence of an issuance premium from the other two types of bonds. The premia on social bonds decreased significantly after the outbreak of COVID-19. As most studies have focused on green bonds, the literature on SRI bonds has largely been silent about social bonds and sustainability bonds. By focusing on these two less researched SRI bond types in addition to green bonds, we help expand our knowledge on SRI bond markets. Moreover, to the best of our knowledge, this is the first study to examine the SRI bond market in South Korea.

Herd Behavior of Investors and Default Risks of P2P Online Lending

We examine the impact of investors’ herding on the default risk of P2P online loans. More specifically, we first decompose the number of investors in each loan into two components: the component caused by public information and the component reflecting factors other than public information. Then we investigate the effect of each component on the default risk of loans, using an ordered probit analysis. We use the data on 3,720 loans that were traded through 8percent, a Korean price-posted P2P platform from February 2015 to December 2017. We find the results as follows: First, the number of investors is determined by information that are provided by the platform and macro-economic variables (hereafter public information). Second, the number of investors explained by public information decreases the default risk of the loans. However, the number of investors reflecting factors other than public information increases the default risk of the loans. These results are interpreted as an evidence supporting ‘herding’ hypothesis: Investors follow intentionally other investors’ investment decision. These results suggest that the quantity increasement and quality improvement of public information provided by a P2P platform can improve the efficiency of P2P lending market reducing herding caused by factors other than public information.