Choon-Geol Moon

Do Bankers Sacrifice Value to Build Empires? Managerial Incentives, Industry Consolidation, and Financial Performance

Bank consolidation is a global phenomenon that may enhance stakeholders value if managers do not sacrifice value to build empires. We find strong evidence of managerial entrenchment at U.S. bank holding companies that have higher levels of managerial ownership, better growth opportunities, poorer financial performance, and smaller asset size. At banks without entrenched management, both asset acquisitions and sales are associated with improved performance. At banks with entrenched management, sales are related to smaller improvements while acquisitions are associated with worse performance. Consistent with scale economies, an increase in assets by internal growth is associated with better performance at most banks.

Efficient Risk-Taking and Regulatory Covenant Enforcement in a Deregulated Banking Industry

Over the past two decades, a variety of deregulatory measures have increased competition in the U.S. commercial banking industry. While increased competitive rivalry creates incentives for banks to operate more efficiently, it also creates incentives for banks to take additional risk, potentially threatening the safety of banking and payments system. Commercial bank regulators have responded to this increased potential for risk-taking by formally linking bank supervision and regulation to the level of risks that banks take. In this study we analyze the safety and soundness (CAMEL) ratings assigned by bank supervisors to commercial banks, and search for evidence that these ratings reflect not just the level of risk taken by banks, but also the risk-taking efficiency of those banks (i.e., whether taking an increased level of risk generates higher expected returns). We find that supervisors do distinguish between the risk-taking of efficient banks and the risk-taking of inefficient banks, and that they permit efficient banks more latitude in their investment strategies than inefficient banks. However, we also find that supervisors maintain incentives for both efficient and inefficient banks to manage their risk more efficiently.

Generalized extreme value model and additively separable generator function

Abstract We present the distribution of the maximum random utility in the GEV model and that of the maximum random utilities within the separable subsets in the GEV model with an additively separable generator function. We then formulate the inclusive value of the entire choice set in the GEV model and that of a separable subset of alternatives in the GEV model with an additively separable generator function and relate them to the consumers surplus.

Sectoral Money Demand: A Co-integration Approach

The major emphasis in previous money demand studies has been at the aggregate level, with little systematic attention paid to sectoral differences in money holding behavior. This paper attempts to address the latter issue by focusing on more homogeneous subgroups to gauge money holding patterns. We apply cointegration theory to identify long-run money demand functions for the household and business sectors of the U.S. economy. In general, our results, which are based on the 1960-1990 U.S. monetary experience, suggest substantial sectoral divergences in long-run relationships. In particular, the household sector reveals more stable relationships. The business sector indicates strong interest elasticities, which are found to be negligible for the household case. These findings are invariant to alternative money definitions and for different sample periods. Copyright 1994 by MIT Press.

Macroeconomic aspects of Korea's liberalization policy: A cointegrated VAR study

Abstract This paper examines the transmission of aggregate shocks between Korea and its major trading partners over the decade of the 1980s. Our impulse response analysis, which is based on the cointegrated VAR model, indicates that the country was subject to both foreign and domestic shocks over the past decade, a time period over which trade and financial liberalization measures were aimed at increasing the role of market forces. While this description is accurate to a high degree, the results of our impulse response analysis also suggests that the authorities did actively resist market pressures as well.

Estimating Managers' Utility-Maximizing Demand for Agency Goods

An empirical model of managers’ demand for agency goods is derived and estimated using the Almost Ideal Demand System of Deaton and Muellbauer (AER 1980). As in Jensen and Meckling (JFE 1976), we derive managers’ demand for agency goods by maximizing a managerial utility function where managers allocate the potential value of their firm’s assets to the consumption of agency goods and the production of market value (which, given their ownership stake, determines their wealth). The utility function is defined over wealth and the value of agency goods and is conditioned on managers’ holdings of stock options, the proportion of the firm owned by outside block-holders, and the firm’s capital structure. We obtain the maximum potential value of firms’ assets by fitting a stochastic frontier (upper envelope) to the market value of assets given the investment in those assets. The difference between the potential market value of a firm’s investment in its assets and their actual market value (corrected for statistical noise) is used to gauge managers’ consumption of agency goods. ; The demand function for agency goods (lost market value) is estimated using U. S. data on publicly traded bank-holding companies. Using the adding-up condition, the demand for asset value is derived from it and restated as the utility-maximizing Q ratio. We apply Slutsky’s equation to decompose the effect of a variation in the proportion of the firm owned by managers into a substitution and a wealth effect, which parallel the alignment-of-interest effect and the entrenchment effect. By estimating financial performance in a choice-theoretic framework, the alignment and entrenchment effects of ownership can be identified econometrically. We find evidence that the strength of both effects increases with insider ownership, but ownership by outside block-holders mitigates the entrenchment effect.

Changing Conditions and Quality of Housing

This article analyzes the major trends and features of the housing market. It also reviews governmental programs and policies in light of the critical issues facing this market. Our analysis reveals that the quantity and quality of housing stock for the average Korean has improved greatly over the past four decades due partly to the governments extensive involvement in land development and price regulation. The onset of the economic crisis in November 1997 prompted the government to abolish the various forms of regulations and encourage house financing by the private sector. Since then, housing types have become more diversified and a closer linkage has been established between the capital market and the housing industry. At the same time, the stock of small houses for the poor has fallen off sharply. Accordingly, the government should consider providing more financial resources for low-income housing.

Market Discipline Working for and against Financial Stability: The Two Faces of Equity Capital in U.S. Commercial Banking

The second Basel Capital Accord points to market discipline as a tool to reinforce capital standards and supervision in promoting bank safety and soundness. The Bank for International Settlements contends that market discipline imposes strong incentives on banks to operate in a safe and efficient manner – in particular, to maintain an adequate capital base to absorb potential losses from their risk exposures. Using 2007 and 2013 data on top-tier, publicly traded U.S. bank holding companies, we find that market discipline rewards risk-taking at some of the largest U.S. financial institutions. In particular, we find evidence of two faces of equity investment – dichotomous capital strategies for maximizing value. At banks with higher-valued investment opportunities, a marginal increase in their equity capital ratio is associated with better financial performance, while at banks with lower-valued investment opportunities, a marginal decrease in their equity capital ratio is associated with better financial performance. Because the largest U.S. financial institutions tend to have lower-valued investment opportunities, our results suggest that they may have a market-based incentive to reduce their capital ratio. To the extent that market discipline rewards reducing the capital ratio among the largest banks, it would tend to undermine financial stability. Our results support the need for regulatory capital requirements.

A Greenhouse Gas Emission Model for Korea

We present the main structure of the Greenhouse Gas Emission Model for Korea (GEMA-K), which is developed by IGES to cover the countries in Asia (Greenhouse Gas Eission Model for Asia: GEMA). We describe our estimation methods for the component equations of the energy demand module and the key parameters such as fuel substitution elasticities and technical change parameters entering the computable general equilibrium (CGE) module of GEMA-K.We find that energy demand and CO2 emissions in Korea will continuously increase at a steady growth rate, as long as economic growth sustains. The energy demand and CO2 emissions in the transportation sector will increase rapidly for next two decades mainly due to the increase in income. Energy and CO2 emission profiles of the Korean industrial sector are mainly driven by its structurtal changes toward less energy-intensive industries for the next coming decades. For the residential and the commercial sectors, the increase in CO2 emissions is slower than that in energy demand, since fuel substitution to less carbon-intensive fuels is to occur in these sectors.