This study examines the differential impact of short selling on two types of earnings management: accrual-based and real earnings management. The empirical results indicate that higher short-selling intensity is associated with an increase in accrual-based earnings management and a decrease in real earnings management. These results suggest that short selling may induce accrual-based earnings management, but real earnings management–potentially detrimental to long-term firm value–is constrained by the disciplinary effect of short sellers. Additional analyses on information asymmetry provide limited evidence that information asymmetry moderates the relationship between short selling and earnings management. Furthermore, the effects of short selling do not differ significantly between domestic and foreign short sellers. These findings suggest that the effects of short selling are more likely driven by broad market mechanisms rather than by the information advantages of short sellers or firm-specific information environments. This study sheds new light on the external effects of short selling and the role of short sellers in the Korean market.
This study examines the effect of pension risk on corporate investment decisions, using panel data from Korean listed firms with defined benefit pension (DB) plans over the period 2013-2024. We measure pension risk using the market betas of firms' pension assets and liabilities. Our empirical analysis shows that although the average pension risk among DB plan firms is negative, its relationship with operational asset beta is asymmetrical, conditional on the level of pension liability risk. Furthermore, we reveal that pension risk has a significant positive relationship with corporate investment, indicating that firms with higher pension risk are prone to overinvestment, characterized by the undertaking of negative-NPV projects. This interpretation is reinforced by the finding that cost of capital tends to be underestimated in firms with elevated pension risk. Lastly, we find a positive relationship between pension risk and real investment in small, highly underfunded firms, providing evidence consistent with the risk-shifting hypothesis. This suggests that such firms may increase investment risk at the expense of pension beneficiaries.
This study examines the relationship between green innovation and firm misvaluation using panel data from environmentally sensitive firms between 2003 and 2021. Using firm fixed-effects models, we analyze how green innovation relates to deviations of stock prices from fundamental values. The results indicate a positive association between green innovation and firm misvaluation. However, the evidence for undervalued firms is weak and often statistically insignificant, whereas the relationship is more pronounced among overvalued firms. We also examine heterogeneity across firm types. While there is limited evidence of stronger effects among business-to-consumer (B2C) firms, the association between green innovation and misvaluation appears more consistent among business-to-business (B2B) firms. Overall, the findings suggest that green innovation may be associated with pricing deviations from model-implied values in European environmentally sensitive industries.
This study aims to propose a quantitative criterion applicable to the Value-Up Program in the Korean stock market. With the simple theory, we re-interpret a firm's price-to-book ratio (PBR) as the ratio of return on equity (ROE) to the cost of equity (CoE). Using the analysts' earnings-per-share (EPS) forecasts for listed Korean firms from 2011 to 2024, we empirically examine the determinants of PBR. We first find that the estimated contribution of ROE/CoE to PBR is close to the theoretical benchmark of one, strongly supporting our theoretical prediction. In particular, we argue for the importance of distinguishing between high-quality (i.e., ROE/CoE > 1) and low-quality (i.e., ROE/CoE < 1) firms. A firm's payout ratio exhibits a positive effect on PBR only for low-quality firms, while the effect is weak or even negative for high-quality firms. A firm's ROE/CoE ratio plays a significant role as the primary explanatory variable for PBR across both KOSPI and KOSDAQ markets. However, additional analyses using a conventional (expost) ROE variable and a firm-specific beta coefficient in the stock market fail to show consistent results, suggesting that the Value-Up Program in Korea should consider a firm's forecast-based ROE and CoE.
This study examines the relationship between CEO turnover and corporate cash holdings through the lens of managerial cash retention motives, using data from firms listed on the Korea Exchange from 2014 to 2023. The findings indicate that CEO turnover is associated with a significant increase in cash holdings, particularly in firms facing heightened uncertainty and financial constraints, aligning with precautionary motives. This effect is also more pronounced in firms with weaker market monitoring, which is consistent with agency motives. Additional analyses show that both the precautionary and agency motives become more influential in non-chaebol firms, and in cases of forced turnover and external CEO appointments. Conversely, neither motive is significant in chaebol-affiliated firms, voluntary turnovers, or internal promotions. These findings suggest that the increase in cash holdings following CEO turnover is driven by the simultaneous operation of both motives under specific conditions.
This study examines how disclosure-intensive cross-listing regimes affect information asymmetry between foreign and domestic investors in an emerging equity market where foreign investors initially hold informational advantages. Using intraday trade and order data from the Korea Exchange over the period 2014-2016, we examine how variations in disclosure intensity affect the magnitude and persistence of foreign investors' trading advantages. Foreign investors consistently earn higher trading profits than domestic investors, indicating the existence of informational advantages. However, these advantages are less significant for firms cross-listed on the New York Stock Exchange, which are subject to stringent disclosure and enforcement standards. Profit decomposition shows that the decline in foreign investors' relative performance is concentrated in long-term profits, while short-term profits remain modestly enhanced, consistent with faster information incorporation and the shortened lifespan of long-lived private information. Overall, our results indicate that disclosure-intensive cross-listings primarily affect the persistence, rather than the existence, of informational advantages.
After the launch of Korea’s first alternative trading system (ATS) on March 4, 2025, this study examines its impact on the Korea Exchange (KRX) by analyzing consolidated order book and transaction data for 800 KOSPI and KOSDAQ stocks dually listed on both markets from March to June 2025. The results show that prices formed in the ATS pre-market have a statistically significant positive effect on KRX opening prices, with this effect being particularly strong for KOSDAQ stocks, indicating that the ATS pre-market is perceived as an important investment signal. Significant interactions are also identified among returns during KRX trading hours, ATS main market returns, and individual stock futures returns, although the price discovery linkage between the ATS main market and the futures market is relatively weak for KOSDAQ stocks. Liquidity is found to transfer smoothly between the ATS main market and KRX trading hours for concurrently traded stocks. Furthermore, the ATS main market exerts a lagged negative effect on KRX closing prices, especially for stocks favored by retail investors. This study is the first empirical analysis of the Korean ATS, providing foundational evidence on enhanced price discovery and liquidity linkage while highlighting the need for regulatory oversight to address potential unfair trading risks.
This study examines whether investor regret can explain cross-sectional variation in asset returns from a behavioral finance perspective. Traditional regret measures define regret primarily based on past returns, but investors in real markets may rely on multiple salient reference points such as market capitalization and trading activity. Prior studies show that regret based on the industry's highest return has predictive power; however, using a single reference point may not fully capture actual investor psychology. To address this limitation, we define new regret measures based on market capitalization (SIZEREG), trading volume (VOREG), and trading value (VOPREG), in addition to the conventional return-based regret (RETREG). Using Fama-MacBeth regressions for KOSPI and KOSDAQ stocks from 1986 to 2024, we find that all regret variables significantly predict future returns. SIZEREG shows the strongest explanatory power, suggesting that highly visible, large-cap stocks serve as important psychological reference points for investors. Multivariate regressions confirm that SIZEREG remains robust after controlling for firm characteristics and consistently outperforms RETREG. Double-sorting portfolio analyses further reveal that its predictive effect is stronger for small-cap, high-volatility, and low-price stocks. Robustness tests across alternative definitions and industry conditions support the stability of the results. Overall, the findings indicate that regret is shaped not only by past returns but also by attention-grabbing market features, offering meaningful implications for behaviorally informed investment strategies.
This study evaluates the Duration Times Spread (DTS) framework in the Korean corporate bond market. Using a comprehensive dataset covering more than 3.8 million bond–month observations from 2010 to 2020, we examine whether the key empirical properties underlying DTS—the proportional relationship between spread levels and spread volatility—hold in this market. Our results show that both systematic and idiosyncratic spread volatilities are proportional to the level of spreads, and that excess return volatility increases proportionally with DTS. These findings confirm the central assumptions of the DTS framework and demonstrate that relative spread changes provide a more stable basis for forecasting excess return volatility than absolute spread changes. When compared against the traditional spread-duration approach, DTS yields residuals that are closer to zero on average and more tightly distributed, indicating superior forecasting accuracy. Overall, the evidence extends the applicability of DTS to an understudied fixed-income market and highlights its usefulness for credit risk measurement, portfolio construction, and volatility forecasting in the Korean corporate bond market.
This study examines the causal relationship between exchange-traded fund (ETF) ownership and stock liquidity in the Korean equity market. Using a panel dataset of firms listed on the KOSPI and KOSDAQ, we analyze the effect of ETF ownership on several liquidity measures, including the Amihud illiquidity measure, Lesmond transaction cost measure, and high-low spread. The results indicate that increases in ETF ownership significantly improve stock liquidity even after controlling for firm characteristics and fixed effects. We further test for potential reverse causality—whether stock liquidity attracts ETF ownership—and find only limited evidence supporting this channel. Both the magnitude and statistical significance of the reverse effect are substantially weaker than those of the direct impact of ETF ownership on liquidity. Overall, these findings suggest that ETFs are not merely passive investors but play an active role in enhancing stock market liquidity. This study provides new evidence on the relationship between ETF ownership and stock liquidity in the Korean market and highlights the implications of ETF growth for market microstructure.
This study investigates the determinants of shareholder proposals in 238 Korean listed firms from 2018 to 2024. Using a logit regression model, the analysis categorizes proposals into three types: board and auditor appointments, shareholder returns, and amendments to the articles of association. The findings indicate that both ownership structure and the information environment significantly influence the likelihood of shareholder proposals. Firms with higher ownership by controlling or foreign shareholders tend to receive fewer proposals, implying that concentrated ownership discourages shareholder activism. In contrast, firms with lower information asymmetry, characterized by lower stock price volatility and longer history, are more likely to receive proposals, suggesting that accessible information facilitates shareholder engagement. Additionally, the determinants differ by proposal type. Governance-related proposals, such as board appointments and bylaw amendments, are primarily driven by ownership structure, regardless of firm performance. Meanwhile, shareholder return proposals are strongly and positively associated with profitability, indicating that shareholders are more likely to demand higher returns from financially successful firms. This study offers empirical insights into shareholder activism in Korea and underscores the differentiated nature of shareholder proposals and their implications for corporate governance.
This study evaluates the predictive performance and investment value of various models for forecasting monthly KOSPI returns using macroeconomic and financial variables. Our empirical findings show that the rolling-window LASSO and Random Forest models significantly outperform other competing approaches, including standard linear regression and deep learning methods. Using three different hyperparameter tuning criteria, we find that while the performance of the Random Forest model is highly sensitive to hyperparameter choices, the rolling-window LASSO model, which accounts for time-varying relationships between KOSPI returns and predictive variables, consistently delivers superior predictive accuracy and investment performance. Furthermore, no single hyperparameter tuning criterion consistently yields optimal investment outcomes, underscoring the importance of employing multiple evaluation metrics for hyperparameter tuning in practical applications.
Using extensive firm-level data, this study evaluates the explanatory power of shareholder rights and payout ratios, factors commonly cited as contributing to the “Korea Discount.” Our analysis of a sample of 58 countries from 2002 to 2018 reveals that shareholder rights or protection in Korea's market are not inferior to those in other markets. Conversely, Korea’s market ranks lower on the Economic Policy and World Uncertainty Indices, suggesting that these factors are potential causes of the Korea Discount. Meanwhile, compared with companies in other countries, Korean companies make larger payouts (i.e., the sum of dividends and share repurchases). Notably, firm value plummeted over the long term in markets where payouts increased the most. Therefore, there is no empirical evidence that "low payouts cause the Korea Discount" or "higher payouts can resolve the Korea Discount." Finally, South Korea’s market shows a significant turnover, indicating short-term investment behavior, and very low value-relevance, suggesting that short-term investors dominate the Korean market and do not consider corporate fundamentals. The study also found that low value-relevance and high turnover are associated with low firm value in our sample countries, indicating a relation between excessive short-term trading and the Korea Discount.
This study empirically examines the impact of COVID-19 on the prepayment rates of mortgage-backed securities (MBS), using monthly data from the Korea Housing Finance Corporation (KHFC) spanning June 2004 to December 2022. The analysis reveals that prepayment rates declined during the pandemic, primarily because borrowers prioritized liquidity amid heightened employment insecurity, reduced income, and broader economic uncertainty. Notably, increased market volatility—reflected in indicators such as the VIX—and rising base interest rates further discouraged prepayment behavior. However, these behavioral shifts appear to be temporary, with prepayment patterns expected to gradually revert to their previous trajectories as economic conditions stabilize. This study sheds light on how exogenous shocks such as the COVID-19 pandemic influence financial consumer decision-making and offers meaningful policy implications for promoting financial market stability and enhancing MBS risk management strategies.
This study empirically investigated the significant positive premium from the short-term market beta in the previous month in the Korean stock market. This positive premium was not observed in the market betas for any other one-month estimation period or for any of the various month combinations within the past 12 months. This implies that the previous month provided differential information for the short-term market beta. Moreover, the short-term market beta premium was identified even after controlling for anomalies (size, short-term reversals, idiosyncratic volatility, maximum, and liquidity) that may generate negative premiums in the future from the previous month. This means that unique information from the previous month influenced the short-term market beta. These results suggest that the short-term market beta has a differential predictive ability that can explain cross-sectional return variations in terms of risk and return. In addition, when applying the same test process to the U.S. stock markets, no significant positive premium was identified from the market beta of the previous month. In exploring behavioral explanations, the positive premium of the short-term market beta was closely related to net buying trades in the high trading activity of individual investors and net selling trades in the high trading activity of foreign investors.
This study analyzed the effect of pension contribution underfunding on corporate investment for Korea Exchange-listed firms over the sample period of 2013~2022. The firms were classified into defined benefit (DB) plans and defined contribution (DC) plans according to the pension system they operated, construct annual pension contribution underfunding data for each firm. The key findings are as follows. First, in DB plans, annual underfunding was generally negatively related to new investment; however, this relationship was asymmetric depending on the level of underfunding. Specifically, firms with low underfunding showed a significant tendency to invest less, while those with high underfunding significantly overinvested. Second, this asymmetry was particularly pronounced among firms listed on the KOSPI market and the results of controlling for financing constraints showed that overinvestment in the high-underfunding group predominantly occurred in small and financially distressed firms. This suggests that overinvestment in these firms may be attributable to the risk-shifting hypothesis identified in prior studies. Lastly, the asymmetrical results identified in the DB plan sample were confirmed in the DC plan sample.
This study investigates which factors - growth potential, shareholder payout, or corporate governance—explain the persistently low price-to-book ratios(PBRs) of Korean firms. We find that corporate governance has no significant relationship with PBR, and firms with higher shareholder payout tendencies tend to have lower PBRs. This contradicts prevailing hypotheses that associate shareholder payout and governance improvements with higher valuations.In contrast, variables linked to corporate growth potential exhibit a strong correlation with PBR. Firms with low research and development (R&D) expenditures and investments, those with a higher proportion of tangible assets (e.g., plants and land) rather than intangible capital (e.g., patents and brand value), and mature firms beyond their growth phase tend to have lower PBRs. These findings suggest that the low PBR of Korean firms is primarily stem from weak growth prospects. A low PBR has traditionally been associated with high stock returns due to the value premium effect. However, this effect, both in Korea and globally, declined sharply following the 2008 global financial crisis. Therefore, the low PBR and stock returns of Korean firms can be interpreted as a consequence of the disappearance of the value premium in an environment of diminishing corporate growth potential.
We proposes a methodology for evaluating the risk-adjusted returns of target-date funds (TDFs) in South Korea and assess their cash flows and market share. Employing Balduzzi and Reuter’s (2019) five-factor model, we adapt the framework to account for the unique characteristics of Korean TDFs. Given the limited allocation to alternative investments in these funds, we exclude the alternative investment factor. Instead, we incorporate four primary factors—domestic equities, foreign equities, domestic bonds, and foreign bonds—and augment the model with the USD/KRW exchange rate to capture the substantial overseas investment exposure, resulting in a modified five-factor model. Our findings reveal that both four-factor and five-factor alphas exhibit significant sensitivity to investor decisions, which in turn drive long-term TDF cash flows. Further analysis indicates a positive relationship between risk-adjusted returns and both cash flows and market share, with the five-factor alpha demonstrating a stronger influence than its four-factor counterpart. Notably, fund families achieving top-tier performance rankings (first or second place) experience pronounced market share growth. Korean TDF investors appear to rationally evaluate risk-adjusted returns while accounting for fund net assets. These results underscore the critical role of risk-adjusted performance in the Korean TDF market, offering valuable insights for financial regulators and fund families seeking to enhance competitiveness.
This study examines the asset pricing implications of organization capital, a type of intangible asset, in the Korean stock market. We measure firms’ organization capital by accumulated selling, general and administrative expenses, and we additionally consider an alternative measure based on the accumulated expenses on wages and R&D activities. When forming quintile portfolios based on the ratio of organization capital to total assets (OA), we find that the highest quintile OA portfolio earns higher mean and risk-adjusted returns than the lowest quintile OA portfolio, consistent with the previous finding in the US stock market. More importantly, the positive OA–return relation is stronger for the OA measure based on wages and R&D activities, both of which are closely related to human capital. Finally, we find that while high-OA firms are less exposed to market risk than low-OA firms, the former are more negatively exposed to technology shocks than the latter. This result suggests that a technology shock—a systematic risk distinguished from the market risk—is the driving factor for the positive relation between OA and stock returns. Furthermore, our results imply that a technology shock can play a significant role in asset pricing in the Korean stock market.
We evaluate the Frazzini-Pedersen (2014) Betting-Against-Beta anomaly in the Korean stock market following Novy-Marx and Velikov’s (2022) critique. Our empirical findings are as follows. First, the rank-weighted portfolio used in the BAB strategy is similar to the equal-weighted portfolio in the sense that it consists of higher small and microcap stocks and lower large stocks compared with the value-weighted portfolio in the Korean stock market. Second, the beta-neutral portfolio constructed with the rank-weighted betas is similar to the one with the equal-weighted betas in the deleveraging procedure, and the beta-neutral strategy with the rank-weighted portfolio overstates the profitability of the BAB strategy. Third, the FF-3 risk-adjusted return of the BAB strategy becomes insignificant after netting out the transaction costs in the Korean stock market. Fourth, the betas estimated by the method Frazzini and Pedersen suggest are heavily biased in a predictable way and the bias generates significant errors in beta hedging in the Korean market. Fifth, we cannot find any evidence supporting the beta compression hypothesis and/or the borrowing constraint hypothesis in the Korean stock market if betas are estimated in the standard methods observed in the literature.
