Research Papers

  102 Results

Based on theoretical and empirical research results from uniquely designed analysis frameworks, KCMI Research Papers draw out implications as well as policy directions for Korea’s financial industry and markets.

보고서 1
Determinants of stock returns in Korea - A structural analysis based on capital investment returns [23-08]
Research Fellow Jang, Bosung / Dec. 07, 2023
This paper examines long-term structural drivers in the Korean stock market. The empirical analysis reveals that returns on capital investment effectively account for the long-term movements of stock returns from 1980 to 2021 period and that the average investment return declined after 2000. Theoretically, investment returns consist of two components: the return on the marginal product and the return on installed capital. In the 2000s, while returns on the marginal product saw a modest increase due to cheaper capital prices, the overall investment return fell due to decreases in returns on installed capital. This decline can be attributed to the deterioration of installed capital, influenced by large-scale restructuring following the Asian financial crisis, stagnant labor supply, and low growth potential.

Motivated by the empirical success, this study also presents projections on investment returns based on population scenarios provided by Statistics Korea. The projections for the next 20 years offer the following results. First, investment returns closely track population growth. Second, the cumulative investment return in the high (low) population scenario exceeds (falls short of) the median scenario by approximately 20%p. Third, a 7%p increase in labor supply from the 50-64 age group and a 10%p increase from females lead to substantial increases of 24%p and 36%p in the cumulative investment return, respectively.

Notably, the returns from the scenarios with increased labor supply outperform that with a total 0.3%p increase in total factor productivity (TFP) growth over 20 years. Considering that TFP growth in the 2000s has dropped by half compared to the 1980-1990 average, its improvement seems challenging. Consequently, the findings suggest that improving the labor market is essential to counteract the slowdown in TFP growth, benefiting both the real economy and the stock market in Korea.
보고서 1
Characteristics of Korean won FX markets and the effects of market opening to non-residents [23-07]
Senior Research Fellow LEE, Seungho and others / Oct. 20, 2023
This paper studies the effect of Korea’s inter-bank FX market opening to non-residents and the extension of trading hours on the market volatility and trading volume, following the government plan announced in February 2023. It is worth analyzing the effect in a sense that the off-shore won/dollar NDF market has rapidly grown relative to the on-shore spot market while the amelioration of FX market infrastructure resulting from the market opening is the one of the key issues in widening the accessibility of foreign investors.

The growth of off-shore won/dollar NDF trading volume has been noticeable compared with other emerging market currencies. As a result, it affects the won/dollar exchange rate through not only the direct trading between domestic banks and non-residents but also indirect channels through off-shore NDF rates. According to the empirical analysis, the off-shore NDF rates seem to unilaterally affect the spot rate.

The simulation results using the agent-based market model (ABM) show that the market opening has little impact on the exchange rate volatility while the trading volume is expected to increase steadily. Meanwhile, these positive effects could be strengthened if the share of non-residents trading during the extended hours surpasses more than 20 percent of those trading during the regular hours. Also, it is found that the FX market turmoil arising from the market opening could be manageable as the resultant volatility would remain at a similar level to that of the recent global financial uncertainty.

These results imply that no discrimination between residents and non-residents and minimized procedural inconvenience for non-residents are required to induce more non-residents’ participation because sufficient non-residents‘ participation is a crucial element for successful market opening. In addition, the government needs to monitor closely whether any unexpected market turbulence occurs after the market opening. From a longer-term perspective, the market opening should serve as a stepping stone for the internationalization of the Korean won which is a prerequisite for further developing the financial and FX markets and maintaining financial stability of Korea.
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.