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보고서 1
Analysis of the effects of short selling restriction [23-05]
Senior Research Fellow Kim, Joon-Seok and others / Aug. 25, 2023
During the COVID-19 pandemic that began in 2020, the short selling regulations in the Korean stock market has undergone many changes. As there are still many controversies regarding the short selling regulations, it is very meaningful to investigate how the short selling regulations affects the stock market, and it can provide important implications for the future regulatory directions. This report reviews major changes in the short selling regulations during the COVID-19 pandemic, and conducts empirical analyses on the effects of the changes in the short selling regulations on the price efficiency, market liquidity, and return volatility. 

In March of 2020 when the market plunged by rapid spread of COVID-19, short selling for all listed shares was banned in Korean stock market. Though market makers were exempted from the ban, even market makers minimized short selling activities. As the stock market rebounded and market sentiments was stabilized, in May of 2021 the short selling ban was lifted for constituents of KOSPI200 and KOSDAQ150. The short selling would not be allowed for non-constituents shares until the regulator amend the regulation policy for the short selling.    

Empirical results are consistent with theoretical prediction and previous empirical analysis on short selling ban in general. First, price efficiency decreases, the return volatility and the frequency of extreme returns increase, and liquidity decreases after short selling ban. Particularly, volatility of positive returns and the frequency of extreme positive returns increases remarkably, which implies that short selling ban might fail to eliminate overvaluation. However, interestingly, while short selling ban expels institutional investors and raises the proportion of retail investors who are limit order traders, quoted spread decreases. 

Second, return volatility and the frequency of extreme returns decrease and turnover increases after the partial lift of short selling ban. Results for price efficiency vary with efficiency measures and quoted spread is widened due to the decrease of retail investors after the partial lift of the ban. Because short selling activity is lower in the post-ban period than in the pre-ban period, the results of the lift of the ban might not be as strong as those of the ban. 

Our results in Korea stock market reconfirm the adverse effect of short selling ban shown in the previous empirical and theoretical studies. Short selling ban might deteriorate price efficiency, increase return volatility, and reduce liquidity. To design the regulation of short selling, the regulator has to consider the role of short selling in the market and the possible negative impact of short selling ban on the market efficiency. It is desirable to design step-wise regulation and to prohibit illegal activity than to call a market-wide ban on short selling. 
보고서 1
Motivation and Long-term Performance of Acquisition and Resale of Treasury Shares [23-06]
Research Fellow Kang, Sohyun / Feb. 23, 2023
Acquisition and disposal of treasury stocks were permitted through revisions to the Securities and Exchange Act in the 1990s, and the listed companies have been actively utilizing treasury stocks. According to the undervaluation hypothesis, the acquisition of treasury stocks is used as a means to inform the market when a company's stock price is undervalued compared to its real value. More than 90% of the acquisition purpose reported in public disclosure was stock price stabilization and shareholder returns.

Outside investors, however, cannot easily evaluate the intrinsic value of a company. There is a possibility that the acquisition of treasury stocks could be used as a false signal. Taking advantage of information asymmetry between insiders and investors, companies may opportunistically use disclosure of treasury stocks. The disclosures can be used for boosting short-term stock price or for the private benefit of corporate insiders.

In addition, regulations on the acquisition and disposal of treasury stocks in Korea differ from those in overseas markets. In most countries, treasury stocks are immediately retired after the acquisition, or disposal is regarded as equivalent to issuing new stocks. On the other hand, domestic regulations are relatively flexible, allowing companies to dispose of the acquired treasury stocks at its discretion. Not only by acquiring treasury stocks directly in the open market, companies can also acquire treasury stocks indirectly through trusts or treasury stock funds, which is a unique method difficult to find in other countries. The indirect acquisition has weaker regulatory constraints compared to direct acquisition in various aspects, such as a longer acquisition period, no compulsion to acquire the entire amount of trust contracts, and permission to dispose of treasury stocks during the trust contract period, making it difficult to assert shareholder return effects.

This paper comprehensively examines on the acquisition and disposal of treasury stocks by domestic listed companies. Using public disclosure data on the acquisition and disposal of treasury stocks from January 2015 to May 2022, empirical analyses are conducted on the real motivation and long-term effects of the acquisition and disposal of treasury stocks.

The results of the empirical analyses are summarized as follows. First, the disclosure itself does not provide sufficient information to determine whether a company is actually undervalued. Regardless of the type of disclosure, stock prices rose significantly after the announcement. On average, however, insiders sold their company stocks prior to the disclosure, and the share of insiders decreased. the trading pattern of insiders is contrary to the prediction of corporate undervaluation, making it impossible for outside investors to distinguish between genuine undervaluation signals and false ones.

Second, repurchase announcements are subject to insider opportunism in cases when insiders sell their shares before repurchase disclosures. The sale of insiders continues even after the announcements. This suggests that insiders do not personally believe that the firm is undervalued, and maintain their thoughts even after the announcement., resulting in the continued sales of shares. Therefore, if insiders sell their holdings even though the company has announced the acquisition of treasury stocks, it is highly likely to be a false signal.

Third, in case of indirect acquisition, it is difficult to regard it as reliable information even if the insider's share increases. Insiders do not sell their stocks after the announcement, whereas in the case of indirect acquisition, they sold a significant amount of their holdings after the share price rose sharply due to the announcement of the acquisition of treasury stocks. Insiders of a company that chooses indirect acquisition may use the flexibility of the indirect acquisition system to induce a rise in stock prices through public disclosure and to pursue private interests by selling individual shares.

Fourth, the disposal of treasury stock is freely used for various purposes such as employee performance compensation and financial structure improvement. In most cases, it has been shown to have a positive effect on stock prices. Depending on the insider's stake, some long-term performance is different, so it is judged that it can be used as a complementary method to judge the effect of disclosure.

According to the above analysis results, there is a possibility that the acquisition of treasury stocks by domestic listed companies is a false signal, unlike the company's disclosure purpose. The background of the disclosure of the acquisition of treasury stocks is questionable because insiders who influence decision-making show a different transaction behavior from the disclosure. If companies use their treasury stocks for opportunistic purposes, the credibility of the company and the market will inevitably be damaged.

Therefore, it is necessary to comprehensively review and prepare countermeasures against private profit-seeking behavior by insiders. In addition, it is necessary to actively consider improving the indirect acquisition of treasury stocks, a system difficult to find overseas. Indirect acquisitions are subject to more flexible regulations than direct acquisitions, making it difficult to determine the effectiveness of disclosures, and are highly likely to be used as false signals. More fundamentally, it is necessary to discuss the validity of the current legal interpretation of treasury stock. Although treasury stocks are not recognized as assets from an economic point of view, they take a contradictory attitude that does not clearly deny their asset properties legally. As a result, the disposal of treasury stocks occurs freely for various purposes, and there are cases where controlling shareholders abuse their treasury stocks for personal gain. It is necessary to supplement the treasury stock regulation system so that it can play a role as a shareholder return method through fundamental improvement and regulation revision.
보고서 1
Bigtech and financial stability [23-04]
Senior Research Fellow Lee, Hyo Seob / Feb. 06, 2023
As the Fourth Industrial Revolution continues to accelerate, big techs equipped with innovative ICT are increasingly entering the financial services industry. Amid their expansion into banking, insurance, securities and electronic finance sectors, major big techs based in Korea and overseas have been praised for their positive role in offering more convenient, affordable and universal financial services. On the other hand, there are concerns that big techs may neglect their duty of consumer protection and threaten financial stability while rapidly taking up share in the financial market. A case in point is Wirecard, a fast-growing European big tech, which went bankrupt in June 2020. Its bankruptcy caused a massive loss to Wirecard users, which was transmitted to associated financial services firms. This has raised the need to monitor financial risks from big techs’ expansion into the financial sector and to regulate relevant big techs. Korea also has experienced the suspension of Kakao financial services arising from the Pangyo data center fire in October 2022 and the Mergepoint scandal in August 2021. These cases inflicted huge damages on users, thereby leading to the need for regulating large-scale fintechs or big techs. As the market share of Korean and global big techs is growing in the financial services industry, it is likely to compromise the interests of financial consumers and impair financial stability. However, Korea has a lack of research on how to enhance financial stability in preparation for big techs’ penetration into the financial sector.

Global financial supervisory organizations including the Bank for International Settlements (BIS), the Financial Stability Board (FSB) and the International Monetary Fund (IMF) have found that big techs’ entry into finance could offer economic benefits such as improving the convenience of financial consumers, addressing information asymmetries and cutting down costs for searching and transaction. But they also argue that big techs’ data monopolies and network externalities could hurt the interests of financial consumers and pose a threat to financial stability. The organizations have presented decreased welfare of financial consumers resulting from price and product differentiation strategies, mis-selling, unfair business practices and abuse of information as side effects of data monopolies, while pointing out unnecessary concentration within the financial services industry, deteriorating financial soundness and the increase in systematic risks as risks from network externalities. Korea’s big techs could be exposed to such risks. What should be also noted is that they are subject to less strict regulations and have a wider work scope and greater market dominance based on ICT, compared to financial services firms, although they provide essential financial services. This makes Korean big techs more susceptible to financial risks than their foreign counterparts.

In this article, big techs are defined as service providers that qualify for online platform provision, undertaking of essential financial services, and scale and user requirements to analyze financial risks posed by Korea’s big techs. According to analysis results, big techs have lower core financial risks than financial services firms such as market and credit risks, while showing higher operation risks. As for concentration and reputation, big techs exhibit higher risks. But it is hard to say that their risks regarding liquidity, law and system are higher than those of their counterparts in the financial services industry. Considering that big techs see risks related to credit, operation, liquidity, concentration and system increasing at a more rapid pace, compared to financial services firms, it is necessary to thoroughly monitor relevant risks. In addition, this article explores the possibility that increased risks of big techs would endanger other financial institutions, financial markets and infrastructure. Notably, market and credit risks of big techs are less likely to spread to financial institutions, whereas operation risks of big techs could be transmitted. Furthermore, big techs could offer poor brokerage services for non-traditional assets such as real estate P2P lending, brokerage of unlisted stocks and digital assets, which potentially undermine the stability of the financial market. Also, ICT-related disruptions and hacking incidents caused by big techs could disrupt financial infrastructure.
As stated above, Korea’s big techs are experiencing rapid growth of major financial risks while increasingly providing essential financial services. Accordingly, they are likely to destabilize financial institutions, financial markets and infrastructure. To make the financial system more stable, Korea’s authorities should devise specific regulations for big techs. First, big techs offering essential financial services should be subject to regulations applicable to financial services firms in terms of market entry, financial soundness, business practices and consumer protection. For instance, as a way of resolving ambiguity between advertisement and intermediary services, advertisement regulation can apply to continuous information provision involving unidentified products and consumers while strict rules of investment solicitation can be applicable to other intermediary services. Second, major big techs engaging in essential financial services should be designated as financial conglomerates and be subject to more rigorous regulations regarding financial soundness and liquidity. Third, it is necessary to impose the internal control obligation, applicable to financial services firms, on big techs, specify supervisors’ liability according to big tech executives’ roles and liabilities, and establish the incentive system to reinforce internal control. Fourth, preliminary oversight activities should be harmonized with ex-post supervision. In this respect, stress tests should be regularly conducted for each channel disrupting financial institutions, financial markets and infrastructure, and supervisory measures for financial services firms should equally apply to financial services provided by big techs.
보고서 1
The effect of ETFs on underlying stock markets: Evidence from Korea [23-03]
Research Fellow Kim, Minki and others / Jan. 30, 2023
The Korean ETF market has shown remarkable growth. ETFs, which are low-cost, diversified, and highly convenient investment products, have recorded a high average annual growth of 33% since their introduction in Korea. The growth rates surpass those of global ETF markets in terms of both market size and the number of products. On the other hand, there are concerns about ETFs such as the adverse effects of rising indexation and the impact of frequent trading and money flows of ETFs. Following the literature, this report is aimed to discuss and study the potential impact of ETFs on underlying markets.

This report analyzes the impact of ETFs on Korean stock markets. Based on recent market data on ETFs, this report concentrates on empirical analyses of information efficiency, return characteristics, and volatility.

The empirical results are summarized as follows. First, ETFs promote the reflection of fundamental information on the stock price. The larger the weight of ETF holdings, the stronger the relationship between the stock return and changes in earnings. Also, the post-earnings-announcement drift decreases as ETF ownership increases. These results are clear in the market- or industry-level systematic earnings information.

Second, ETFs cause the co-movement of stock returns in their basket portfolios. In the ETF-level analysis, The more asset held by ETFs, the stronger the synchronization of stock returns within the ETFs. In the stock-level analysis, the return co-movement between stock and market returns is strong for stocks with high ETF ownership. Furthermore, these results are conspicuous for stocks with high ETF trading activity, and both informed and uninformed trading, such as arbitrage activity, contributes to the return co-movement. Overall results imply that ETFs could have negative effects on price efficiency and investors’ diversification.

Third, an increase in stock holdings by ETFs also affects the return characteristics of individual stocks. Empirical results show that high ETF ownership is associated with negative return serial correlation and high systematic return volatility. These results are also strongly observed in stocks with high ETF trading activity similar to the prior results.

The overall results of this report show that the effects of ETFs, which have been empirically confirmed in overseas markets, are also exhibited in the Korean stock markets. The effects of ETFs on information efficiency, changes in return characteristics, and return volatility are related. Those effects could be either positive or negative on underlying stock markets.

Korean ETF markets are still small compared to the global markets. However, considering the remarkable growth of ETFs, the impacts of ETFs examined in this study would be shown constantly and in new aspects. Multifaceted research is needed on the effect of ETFs on capital markets and ways to minimize it.