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보고서 1
Driver Analysis on the Determinants of Change in Corporate Cash Holdings [18-05]
Senior Research Fellow Park, Yong Rin / Dec. 26, 2018
This report aims to analyze the drivers of the secular increase in cash holdings of Korean companies using fund flow identity from cash flow statement in an effort to determine whether the rise in corporate cash holdings stems from decline in corporate investment or rational corporate financial decision making.
This report contributes to the existing literature in the following ways. First, this report adopts a systematic and integrated approach toward identifying the drivers of the increase in corporate cash holdings, utilizing information contained in the corporate fund flow identity. Second, this report employs Dominance Analysis to identify the independent variable with the highest relative importance defined as average incremental explanatory power for the dependent variable. Third, this report integrates the fund flow identity and a variant of the regression equation for the determinants of corporate cash holdings, to generate a regression equation for the determinants of the change in corporate cash holdings.
The fund flow identity means that cash flow from operations as a source of fund, should be equal to the sum of the change in cash holdings, investments, dividends, share repurchases, net debt redemption, and net equity redemption, all of which are uses of funds. The regression equation for the determinants of the change in corporate cash holdings is composed of the change in cash holdings as the dependent variable, and the five uses of funds other than cash holdings, the first difference of stock independent variables used in the literature on the determinants of corporate cash holdings (i.e., asset, R&D, leverage, net working capital, ROA, and sector average cash flow volatility), firm age, and asset tangibility, as independent variables.
The results of empirical analyses including the Dominance Analysis on the determinants of the change in corporate cash holdings are provided below. First, the fund flow variables altogether explain 33% of the change in corporate cash holdings whereas the first difference of the determinants of corporate cash holdings explains the majority. Second, investment exhibits the largest relative importance for the change in corporate cash holding since 2014. In a similar vein, the absolute value of the regression coefficients on the investment has been increasing since 2011. Third, when the sample is separated into positive and negative cash flows from operations, investment has had the dominant explanatory power for the change in corporate cash holdings over the whole sample period.
The analysis results have the following implications. First, the recent increase in corporate cash holdings in Korea has been driven by decreasing corporate sector investment. Second, government policy should focus on how to boost corporate investment, the driver of the increase in corporate cash holdings, rather than trying to suppress cash holdings. Third, financial intermediaries should strengthen M&A and corporate restructuring advisory services in an environment where corporate demand for capital raising dwindles.  
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보고서 1
Characteristics of Korea’s MA Market and Analysis of the Determinant of MA Performance [17-07]
Senior Research Fellow Choi, Soon Young and others / Mar. 31, 2017
Mergers and acquisitions (M&A) is an increasingly important issue in Korea, as economic growth slows down and effective restructuring of Korean companies becomes more urgent. But while there are many suggestions on how to vitalize Korea’s M&A market, there is a general lack of data and research to underpin such discussions. This paper aims to provide a long-term overview and key features of Korea’s M&A market to aid such dialogue. In addition, the understudied topic of Korea’s M&A financial advisory industry, an important component of facilitating M&As, is examined, along with an empirical analysis on the determinants of M&A performance. 
This study uses Korean M&A deal data from Bloomberg, covering the period from 2000 to 2015. Korea’s M&A market size has grown from a meagre 13.1 trillion won in 2000 to 96.2 trillion won in 2015, more than a 7 times increase. The number of M&A deals has also grown from 102 deals in 2000 to 493 deals in 2015. However, in terms of size, much of the growth of Korea’s M&A market has come in the past 2~3 years, driven by a spike in the size of a handful of mega-deals.
M&A market size to GDP in 2015 for Korea(6.5%) was lower than that of the US(10.2%) but on par with the UK(6.5%) and higher than that of Japan(4.3%). However, this was a result of 2~3 mega-deals in 2015, and Korea’s average M&A market size to GDP for the 2000~2015 period as a whole is only 2.9%. Thus, it remains to be seen whether the recent growth spurt will persist going forward. Also, the average M&A deal size in Korea remains very small. Between 2000~2015, the average M&A size was only 94.7 billion won, though it increased to 195.1 billion won in 2015, it is still relatively small.
In terms of cross-border M&As, deal value increased from 4.1 trillion won in 2000 to 14.3 trillion won in 2015, an increase of 3.5 times. Between 2000~2015, the share of cross-border deal value as a share of total Korean M&As was 32.0%. Average cross-border deal size, during this period, however, is small at under 100 billion won.
In terms of industry characteristics, M&As in Korea are predominantly pursued by companies in manufacturing, reflecting the structure of Korea’s economy. Acquirers in the manufacturing industry accounted for 36.2% of deal volume between 2000~2015. However, in terms of deal value, financial services industry at 33.3% of deal value was ahead of manufacturing, reflecting industry restructuring mega-deals in banking, credit-card, insurance and securities industry following the 1997 Asian Financial Crisis and 2003 credit card crisis in Korea. 
Lastly, targets of M&As in Korea are predominantly of unlisted companies. The share of deals where the target company is unlisted and acquirer is listed accounts for 65.9% of deal volume between 2000 and 2015. By comparison, deals where the acquirer and target are both listed companies are only 6.4% of deal volume, one of the reasons why the average deal size of Korean M&A is small. It also implies more M&As involving listed target companies are needed to bring about meaningful restructuring of Korean companies. 
The major players in the Korean M&A financial advisory market can be grouped into foreign investment banks, Korean securities firms and accounting firms. The structure of the financial advisory market appears to be bifurcated, with few but profitable mega-deals dominated by foreign investment banks and the large number of small M&A deals served mostly by accounting firms. Korean securities firms are stuck in the middle, competing with foreign investment banks for the same type of large corporate clients, while competing with accounting firms on small to medium sized deals. 
Empirical analysis looks at whether the unbalanced competitive structure of the M&A financial advisory industry is due to performance difference between the different types of financial advisor, or whether other characteristics, either of acquiring firms or the structure of the M&A deals explain performance differences. M&A performance is measured using a three day window cumulative abnormal return (CAR), based on the event study methodology. 
The main findings of the empirical analysis indicate that there is no direct effect of financial advisory choice in terms of acquirer’s CAR when controlling for acquirer and deal characteristics. Dummy variables on financial advisor type are found to be statistically insignificant in the regression results. On the other hand, statistically significant explanatory variables influencing CAR are asset size and return on assets of the acquiring firm, relative deal size, stock price run-up and stock payment dummy variable. Thus, it cannot be claimed that the reason foreign investment banks dominate Korea’s profitable mega-deal market is due to superior deal performance delivery. Rather, there seem to be other un-included or un-measured differences across financial advisor types which lead to acquiring firms tending to favor certain advisor types. To determining what those influencing factors are remains an important topic for future research.
The relative small size of Korea’s M&A market, despite the recent substantial growth, remains an important challenge that needs to be solved. Relatedly, ways to increase the participation of Korean securities firms in M&A financial advisory roles need to be found. M&A advisory is an important component of advancing the investment banking capabilities of securities firm, which in turn assists in the effective growth and restructuring Korean companies. Towards this end, both policy measures, along with own efforts on the part of Korea securities companies are needed.
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보고서 1
Entrepreneurial Capital Markets in Korea: Current Status and Future Directions [17-01]
Senior Research Fellow Park, Yong Rin and others / Mar. 09, 2017
Entrepreneurial capital in this report is defined as the investment capital in accordance to the corporate life cycle of growth stages (i.e., startup-expansion-maturity-restructuring) with a focus on innovative growth companies. It plays an indispensable role in the economic growth including the development of capital market and financial services industry. Various types of investments or investors such as crowdfunding, accelerators, angel investors, venture capital (VC) and private equity (PE) participate in the entrepreneurial capital market. In this respect, this report aims to diagnose current entrepreneurial capital markets in Korea, and suggest some policy implications for further market and regulatory improvements. 
In terms of the composition of global entrepreneurial capital market, PE accounts for about 71%, VC 12%, and the other types taking up the rest. Global Entrepreneurial capital markets can be largely classified into PE-oriented, VC/PE-oriented, or diversified markets depending on its composition. More importantly, it is becoming more diverse, with new investors or investment schemes such as accelerator, angel investors and crowdfunding. This phenomenon is seen not only in the countries with developed entrepreneurial markets but also in many European countries with developing entrepreneurial markets.
Changing landscape in the global entrepreneurial capital markets can be summarized into the evolutionary change in its participants, increasing dependance of unlisted firms on private capital markets, and the change in the private relationship between market participants. First, development of information technology such as internet and SNS has changed significantly the startup and investment environment. For example, it not only facilitates information creation and its dissemination but also reduce startup costs as seen in lean startup phenomenon. Accordingly, it has helped new types of seed and startup investment schemes such as crowdfunding emerge and shortened time for exit through M&As. Second, more unlisted companies have been able to finance within private capital market, reducing the demand for IPO. In addition, secondary market platforms for unlisted securities have been formed, reducing liquidity risk of entrepreneurial capital. Third, the pattern of capital contribution has changed in order to reduce the agency problem since the global financial crisis. For instance, co-investment or LP’s direct investment have increased in PE market, and the collaborative investment model where strategic investors contribute capital emerged in VC or angel investment market.  
Entrepreneurial capital market in Korea can be characterized as the state-led market. More specifically, public pension funds and government-sponsored financial institutions provide significant amount of capital, which might induce overly risk-averse investment environment stemming from public audit risk. On the manager side, domestic entrepreneurial capital market is VC/PE-oriented market in that VC and PE are dominant players although some accelerator, crowdfunding, and angel investors are active. Another significant problem in the Korean entrepreneurial capital market is its lack of exit markets. For example, domestic VCs depend excessively on IPOs as an exit route. In this sense, We need to diversify exit routes by facilitating M&A or developing alternative secondary markets and organized OTC markets.  
We also have implemented some empirical analysis based on domestic VC and PEF dataset. First, we performed tests to analyze the policy effects of government-sponsored venture capital (GVC) investments from 2004 to 2013. Results show that GVC has helped induce the private investment both in the intensive and extensive margin. That is, GVC has significantly contributed to the growth of VC in Korea. More importantly, this effects is most prominent in the co-investment of GVC and private VC (PVC). In addition, it turns out that co-investment is best while GVC pure investment is worst in its exit performance measured by IPO and M&A after VC investment. Second, we also have done tests to analyze the effects of PEF investment from 2005 to 2014 based on 302 investee companies. Results suggest that Korean PEFs generally invest in fast growing companies in economic boom. Also, investee companies grew significantly after PEFs’ investments in terms of assets, sales, and employment rather than its profitability. This implies that domestic PEFs tend to capitalize on the growth opportunities of investee companies, which is supported by higher exit probability of these investments.
In terms of regulatory and institutional aspects, we employs the concept of private capital market as opposed to public capital market that is a highly regulated market. Private capital market is a unregulated or minimally regulated market. The rationale for such non-regulation or minimal regulation roots on the facts that most investors in this market are sophisticated ones fending for themselves and it also includes small-amount markets having little benefit of regulatory intervention, such as crowdfunding and small-scale funding. From the viewpoint of economic theories, private capital market is a market for sophisticated investors who are able to resolve the problem of information asymmetry based on ‘private relationship.’ Korean capital market laws and regulations employ no such private capital market term, but the term could be understood as a capital market involved in private placement and OTC market from the Financial Services and Capital Market Act (FSCMA) perspective. Capital markets under the FSCMA can be broadly classified into public capital market, private capital market and semi-private capital market.
As one of the common features of overseas private capital market regulation, the US, EU and UK have a favorable regulatory environment in which private capital market may be well formed and developed. The US law provides for quite strict criteria for public and private placement. Capital formation through private placement, however, is active due to the various private placement rules. Likewise, the EU and UK law provide for relatively loose criteria for private placement offering regulatory soil on which private capital market may nourish. In addition, the US, EU and UK have a reasonal criteria for sophisticated investors through which various angel investments can be active. In the secondary market regulation aspects, the US, EU and UK have low entry barriers for investment firms, which enables intermediation of non-registered securities through such firms. In particular, minimal regulation for alternative trading systems (ATSs) provides for the regulatory basis on the emergence of various forms of ATS which intermediate non-registered securities. In the sector of semi-private capital market, the US has completed the legislative actions for securities-based crowdfunding and Regulation A plus, expanding the area of private capital market. The EU and UK have a regulatory room enough for crowdfunding and small-scale funding in the present regulation. As for the private fund regulation, first of all, the notable feature of overseas regulations therefor is the bifurcated regulatory system, specifying distinctive rules for private funds different from public funds. Further, overseas private fund regulation does not separately provide for rules for VC, hedge fund and PEF. but for unitary rules for those private funds with a lowest level of regulation for the managers for the private funds.
On the contrary, the Korean private capital market regulation is strictly bifurcated to public and private markets, and exchange and OTC markets, with the regulatory focus on the public and exchange markets in order to promote those markets taking into little account private and OTC markets. In such a circumstance, the Korean capital market has failed to build up a virtuous circle for the entrepreneurial capital ecosystem, requiring more flexible and private market oriented regulation.
Lastly, we present some policy tasks or future directions for the further development of domestic entrepreneurial capital ecosystem. First of all, more enhanced role of informed capital that identified and supports promising startups is highly desired.  In this sense, more policy efforts are needed to nurture players such as accelerator, angels, super-angels and micro VCs. We also need to diversify LPs and establish evaluation and compensation scheme on LP-side managers in order to strengthen the capital base or overcome overly conservative GP management. Needless to say, domestic GPs of VC an PEFs should make more efforts to enhance investment returns and cultivate their value creation capabilities. 
Exit markets need to be diversified. For instance, we may modify listing criteria to consider growth opportunities more objectively for IPOs. For M&A, we may consider some policy measures that help expand open innovation, improve corporate governance, enhance the role of intermediaries, and establish M&A transaction infrastructures. Establishing more secondary funds or introduction of PE fund of funds may help to diversify exit routes. Finally, private trading platform for unlisted securities need to be introduced after reviewing operational experience in overseas markets.
In order to enhance entrepreneurial capital ecosystem, sustainable private-led ecosystem needs to be established. To this end, it is desirable to utilize the expertise of private fund of funds managers in the management of policy funds. In addition, more incentives need to be provided to private sector LPs, which provides them with call options on fund units held by government or payoff scheme that gives upside potential or preferential distribution waterfall. 
From the regulatory and institutional perspective, it is desirable to establish a tiered regulation system bifurcating public and private capital market regulations, in order to develop the Korean private capital market. Especially, it is required to provide efficient regulation suitable for corporate growth stages and based on private relationship in private capital market. Toward that end, both passive and active approaches are necessary. Passive regulation is desirable for areas that require minimal regulatory intervention, i.e., angel investment, private placement, small-amount funding, crowdfunding, and private fund rules. However, active regulatory intervention is required for supporting the development private capital markets amid technological advances and consequent market changes.
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