Bobae Choi

Corporate Social Responsibility, Corporate Governance and Earnings Quality: Evidence from Korea

Manuscript Type. Empirical. Research Question/Issue. How does corporate governance affect a managers intention to promote corporate social responsibility (CSR)? Is the relationship between financial transparency and CSR activities affected by the business group affiliation and ownership structure of firms?. Research Findings/Insights. CSR ratings are negatively correlated with the level of earnings management when all firms are considered. However, the relationship is weaker for chaebol firms and firms with highly concentrated ownership, which suggests that CSR practices can be abusively used by those firms to conceal their poor earnings quality. The adverse use of CSR is discouraged if the fraction of shares owned by institutional investors is high. However, no evidence is found for a similar moderating effect for foreign investors. Theoretical/Academic Implications. This study suggests that the business group affiliation and the ownership structure of a firm are important factors in determining the managerial incentives to engage in CSR, which can explain the mixed results reported in previous research. In addition, the possibility of a simultaneous relationship between CSR and other key firm characteristics, such as earnings quality, should be considered when conducting research on CSR. Practitioner/Policy Implications. This study provides the insight to investors and other stakeholders that the managerial incentives behind CSR activities can differ depending on a firms characteristics. Care must be taken when assessing the CSR activities, in particular, of firms with weak corporate governance. For policy makers, it is important to ensure that CSR‐related disclosures by firms are based on actual plans and are not intended to deceive stakeholders, especially when the firms are not actively monitored by external shareholders.

Trading Behavior Prior to Public Release of Analyst Reports: Evidence from Korea†

This paper investigates information leakage from analyst reports prior to their public release. Previous studies document abnormal trading by institutions or short selling before announcement of recommendation changes. Such prerelease abnormal trading is interpreted as evidence of information leakage from analyst reports. However, if sophisticated investors obtain information similar to what analysts have from other sources, abnormal prerelease trading patterns would be observed even if there were no information leakage from analyst reports. This paper, using a unique data set from Korea, aims to determine whether a direct causal link between recommendation changes and prerelease trading exists, by comparing trading behavior of client investors with non-client investors. We find that abnormal prerelease trading by client investors, especially client institutions, is earlier in timing and greater in magnitude than that of other investor groups, supporting the information leakage hypothesis. We further find that net buying by client institutions and client large individuals is positively associated with firm, analyst, and earnings forecast change variables that influence formulation of recommendation changes and their impacts.

An Equity Market Perspective on the Korean Financial Crisis

Abstract We examine the movement of Korean stock prices before and after the 1997 financial crisis. Unlike in Japan, as documented by Hamao et al. (Journal of Money, Credit and Banking, 39, pp. 901–923, 2007), we find an increase in firm-level volatility in Korea, which may make it easier for investors to distinguish low-quality from high-quality firms and thus encourage “cleansing” during recessions. The result appears to derive from government efforts to restructure the corporate sector, which targeted highly leveraged firms and chaebol affiliates immediately after the market crash.

The Effect of CEO Stock-Based Compensation on the Pricing of Future Earnings

Abstract This paper examines whether CEO stock-based compensation has an effect on the market’s ability to predict future earnings. When stock-based compensation motivates managers to share their private information with shareholders, it will expedite the pricing of future earnings in current stock prices. In contrast, when equity-compensated managers attempt to temporarily manipulate the stock price to maximize their own benefit rather than that of shareholders, the market may not fully anticipate future performance. We find that a CEO’s stock-based compensation strengthens the association between current returns and future earnings, indicating that more information about future earnings is reflected in current stock prices. In addition, we find that the positive effect is weaker for firms that have a high level of signed discretionary accruals or a low management forecast frequency. Overall, our study suggests that on average, equity-based compensation improves the informativeness of stock prices about future earnings, while opportunistic discretionary accruals or lowered earnings guidance hamper this improvement.

Determinants and market implications of differentiated dividends in Korea

Purpose - – The purpose of this paper is to explore unequal dividend payment policies called differentiated dividends (DDs) in Korea. The characteristics of firms are examined which allocate higher dividends to small shareholders than large shareholders within the same share class. Design/methodology/approach - – Logit analysis is used to compare firms that initiate DDs with those that pay conventional equal dividends. The abnormal market reaction to news of initiation of DDs is also examined. Findings - – Managers of firms facing cash insufficiency are more likely to initiate DDs. The DD scheme is used as a method to cater to high dividend demands in the market. The stock price reaction to the initiation of DDs is positive when the total dividend payments are increased, signifying that the market interprets it as good news. Practical implications - – Firms facing cash insufficiency can avoid an increase in the cost of capital by retaining extra cash from DDs rather than borrowing external funds. Additionally, managers can foster favorable market reactions by using DDs which helps firms in attracting new capital investments. Finally, regulatory bodies can consider encouraging managers to adopt unequal dividend schemes to allow higher dividend payments to small shareholders, especially in countries with weak legal protection for minority shareholders. Originality/value - – Similar unequal dividend policies exist in European countries but there is a lack of research conducted on those policies. The paper provides implications for the strategic use of unequal dividends to maximize firm value.