Kainan Wang

Does hometown advantage matter? The case of institutional blockholder monitoring on earnings management in Korea

AbstractThis study uses a large sample of Korean firms to examine institutional blockholders’ influence on corporate earnings management. The Korean market is an interesting setting to study institutional monitoring because it is dominated by chaebols, which are characterized by ineffective internal governance mechanisms. We find evidence that institutional blockholders deter opportunistic financial reporting, and such activities are the most evident among domestic institutional blockholders. Foreign institutional blockholders, especially those with short-term investment objectives, lead to more discretionary reporting. Our findings are robust to various empirical models and endogeneity checks. Moreover, this study offers new insight into the proximity advantage of domestic institutional investors with regard to monitoring information. It also highlights institutional investors’ roles in shaping corporate governance in emerging markets, in which sound corporate governance has become increasingly important for firms’ long-term sustainability. One important policy implication is that regulatory authorities should aim to promote institutional investors’ participation in these markets. RésuméCette étude utilise un large échantillon de firmes coréennes pour étudier l’influence des actionnaires institutionnels dominants sur la gestion des résultats des sociétés. Le marché coréen constitue un contexte intéressant pour étudier le contrôle institutionnel parce qu’il est dominé par des chaebols qui sont caractérisés par des mécanismes de gouvernance interne inefficients. Nous constatons que les actionnaires institutionnels dominants détériorent le reporting financier opportuniste, et que ces activités sont plus visibles parmi les actionnaires institutionnels dominants domestiques. Les actionnaires institutionnels dominants étrangers, plus particulièrement ceux ayant des objectifs d’investissement à court terme, donnent lieu à un reporting plus discrétionnaire. Nos résultats sont robustes face à plusieurs modèles empiriques et à des vérifications d’endogénéité. Par ailleurs, cette étude offre un nouvel éclairage sur l’avantage de proximité des investisseurs institutionnels domestiques concernant le contrôle de l’information. Elle met aussi en relief les rôles des investisseurs institutionnels dans la structuration de la gouvernance d’entreprise dans les marchés émergents où une gouvernance d’entreprise solide est devenue plus importante pour la pérennité des firmes sur le long terme. Une implication politique importante est que les autorités de régulation devraient s’efforcer de promouvoir la participation des investisseurs institutionnels sur ces marchés.ResumenEste estudio usa una amplia muestra de empresas coreanas para examinar la influencia de los bloqueadores institucionales en la gestión de las ganancias corporativas. El mercado coreano es un escenario interesante para estudiar el monitoreo institucional porque está dominado por chaebols, los cuales están caracterizados por mecanismos ineficaces de gobernanza interna. Encontramos evidencias que los bloqueadores institucionales hacen disuadir los reportes financieros oportunistas, y estas actividades son las más evidentes entre los bloqueadores institucionales nacionales. Los bloqueadores institucionales extranjeros, especialmente aquellos con objetivos de inversión a corto plazo, conducen a reportes discrecionales. Nuestros hallazgos son robustos a varios modelos empíricos y controles de endogeneidad. Además, este estudio ofrece un nuevo entendimiento de la ventaja de proximidad de los inversionistas domésticos institucionales con respecto al monitoreo de información. También resalta los roles de los inversionistas locales en la configuración de la gobernanza corporativa en mercados emergentes, en los que el buen gobierno corporativo se ha vuelto cada más importante para la sostenibilidad de largo plazo de las empresas. Una importante implicación para la política es que las autoridades regulatorias deben tener como objetivo promover la participación institucional de los inversionistas en estos mercados.ResumoEste estudo usa uma grande amostra de empresas coreanas para examinar a influência de blockholders institucionais sobre o gerenciamento de ganhos corporativos. O mercado coreano é um cenário interessante para estudar o monitoramento institucional porque é dominado por chaebols, caracterizados por mecanismos de governança interna ineficazes. Encontramos evidências de que os blockholders institucionais evitam a divulgação oportunista de relatórios financeiros, e que essas atividades são mais evidentes entre os blockholders institucionais nacionais. Os blockholders institucionais estrangeiros, especialmente aqueles com objetivos de investimento de curto prazo, levam a relatórios mais discricionários. Nossas descobertas são robustas para vários modelos empíricos e verificações de endogeneidade. Além disso, este estudo oferece uma nova visão da vantagem de proximidade dos investidores institucionais nacionais em relação à monitoração de informações. Também destaca os papéis dos investidores institucionais na definição da governança corporativa nos mercados emergentes, em que uma sólida governança corporativa tornou-se cada vez mais importante para a sustentabilidade a longo prazo das empresas. Uma importante implicação política é que as autoridades reguladoras devem procurar promover a participação dos investidores institucionais nesses mercados.概要本研究用韩国公司的大样本来研究机构大股东对公司收益管理的影响。韩国市场由于被特点是低效的内部治理机制的财团所主导,因而是研究机构监控的一个有趣环境。我们发现的证据表明,机构大股东阻止投机的财务报告,此类活动在国内机构大股东中最为明显。外国机构大股东,特别是那些投资目标短期的,会导致更多任意决定的报告。我们的发现对各种实证模型和内生检查是稳准的。此外,这项研究在监控信息方面对国内机构投资者的接近优势有新见地。这也凸显了在新兴市场公司治理塑造中机构投资者的角色,其中健全的公司治理对公司长期可持续发展日益重要。一个重要的政策启示是,监管部门应着眼于促进机构投资者在这些市场中的参与。

Institutional investor trading in a short investment horizon: : Evidence from the korean stock market

Abstract We examine the weekly trading activities of institutional investors in the Korean stock market. First, we find that average net trades by institutional investors this week are negatively related to one-week lagged returns, suggesting that they could be contrarian traders. Second, our finding shows that institutional investors’ net trades this week are positively related to the net trades next week, consistent with persistent trading and/or herding behavior. Third, we find that institutional net trades are positively related to the post one-week returns. Finally, our findings are most pronounced in the group of short-term institutional investors.

Modeling Conditional Covariances With Economic Information Instruments

We propose a new model for conditional covariances based on predetermined idiosyncratic shocks as well as macroeconomic and own information instruments. The specification ensures positive definiteness by construction, is unique within the class of linear functions for our covariance decomposition, and yields a simple yet rich model of covariances. We introduce a property, invariance to variate order, that assures estimation is not impacted by a simple reordering of the variates in the system. Simulation results using realized covariances show smaller mean absolute errors (MAE) and root mean square errors (RMSE) for every element of the covariance matrix relative to a comparably specified BEKK model with own information instruments. We also find a smaller mean absolute percentage error (MAPE) and root mean square percentage error (RMSPE) for the entire covariance matrix. Supplementary materials for practitioners as well as all Matlab code used in the article are available online.

Optionable Stocks and Mutual Fund Performance

We examine whether stock-level options information drives mutual fund performance. Our paper is motivated by existing studies indicating that options prices or implied volatilities predict stock returns. We find that stock-implied volatility innovations forecast mutual fund performance. Specifically, mutual funds investing in fewer optionable stocks or optionable stocks with favorable information outperform other funds. In addition, mutual fund managers overall do not trade on past options information. However, well-performing fund managers use that information to decrease their holdings in poorly-performing stocks. Moreover, well-performing mutual funds containing strong options information tend to increase their holdings in optionable stocks in subsequent periods.

Trend analysis of Global Fortune 500 firms: a comparative study of Chinese and Japanese firms

Purpose Over the decade the trend of Global Fortune 500 firms has shown significant changes – Japanese and Chinese firms in particular. The purpose of this paper is to present trend analysis of Global Fortune 500 – Japanese and Chinese firms. Key research questions are: what are the relevant macro-level changes that have affected the growth and decline of Japanese and Chinese firms? What are the industry-level changes that have occurred in Japanese and Chinese firms in terms of firm characteristics and financial performances? What are the lessons and implications from the firms added to or removed from Global Fortune 500? Data analysis is conducted based on Fortune database from 1995 to 2013. Design/methodology/approach The study employs descriptive analysis to examine the trend of Japanese and Chinese firms listed in Global Fortune 500 including: based on revenue and profit figures from 1995 to 2013; the authors perform trend analysis for each of those five types from 1995 to 2013; the authors replicate the analyses for different industry types in terms of the above five types; the authors compare the performances of Japanese and Chinese firms; based on 2011-2013 data, the authors conduct more in-depth analysis for selected firms. Findings The findings suggest five distinct types of firms including “Sustainables,” “New Comers,” “Move Ups,” “Decliners,” and “Drop Outs”; it is interesting to note that the changes in Global Fortune 500 firms suggest how these two countries show their relative competitive advantage. Chinese firms show steady flows of new firms that join in the rank of Global Fortune 500 whereas Japanese firms suggest continuous drop of firms that move out of Global Fortune 500 firms. As China increases its size of economy, state-owned financial institutions, resource-focus firms (e.g. mining and petroleum) firms also rapidly increased its overall size. Although the number is still small, privately owned Chinese global firms (e.g. Lenovo, Huawei, Zhejiang Geely Holding Group, Ping An Insurance) also are now listed as Global Fortune 500 firms. In contrast, Japanese firms that lost their global market positions steadily disappeared from Global Fortune 500 firms. Representative firms include Daiei, Mitsubishi Motor Company, and NEC. Research limitations/implications One limitation of the analysis on financial indicators is that the authors select only a few firms and focus only on two time points. Nevertheless, it provides the authors information about the financial factors that characterize the two types of Global Fortune 500 firms. Moreover, it opens up new opportunities for future research. Practical implications Factors that influence the behaviors of Global Fortune 500 firms suggest both external environmental and internal managerial factors. Although serious external factors (e.g. Global Financial Crisis) affect the outcomes of these competitive positioning, it is still the managerial leadership that makes differences in cases of many Japanese firms. To Japanese firms maintaining domestic advantage is not enough to sustain their position in Global Fortune 500. Global competitiveness matters. On the other hand, it is unclear whether changes occurring in Chinese firms are more managerial than externally dictated. In case of many Chinese financial firms and resource rich firms, the huge domestic advantage has much to do with their position in Global Fortune 500. Originality/value This is the first trend analysis that examines the Global Fortune 500 firms from Japan and China. The authors identify five types of firms that would be an important basis for the further benchmarking studies of Global Fortune 500 firms in other counties (e.g. the USA, Germany, Korea, and other Emerging Economies – Russia, India, Brazil).

Why is Accounting Information Important to Bondholders

The authors investigate the relevance of accounting information for bondholders. Their results imply that credit markets access firms’ default information through accounting signals. This information is reflected through cash flow (CF) and discount rate (DR) news. Specifically, the sensitivity of bond prices to news increases as firms get closer to default, owing to increasing firm-level credit risk or because aggregate credit conditions worsen. However, the latter is more important. Thus, the importance of a given accounting signal depends on 1) the mix of CF and DR news it reflects; 2) the firm’s proximity to default; and 3) the aggregate credit conditions. The authors incorporate these insights into a dynamic trading strategy that earns significant risk-adjusted returns. These results are robust after controlling for liquidity and transaction costs.

Does Institutional Ownership Predict Mutual Fund Performance? An Examination of Undiscovered Holdings within 13(f) Reports

We show that institutional ownership in mutual funds predicts mutual fund performance. Our measure of institutional ownership is directly from institutions’ 13(f) filings and it provides a broader picture of institutional investment in mutual funds than existing studies. We find that funds held by institutions perform better than funds not held by institutions for at least three years. Such outperformance is not subsumed by fund styles, common fund characteristics, and existing performance predictors documented in the literature. Moreover, we find that the outperformance of institution-held funds coincides with institutions’ stock picking skills and their buy trades.