Kee-Hong Bae

Creditor Rights, Enforcement, and Bank Loans

We examine whether differences in legal protection affect the size, maturity, and interest rate spread on loans to borrowers in 48 countries. Results show that banks respond to poor enforceability of contracts by reducing loan amounts, shortening loan maturities, and increasing loan spreads. These effects are both statistically significant and economically large. While stronger creditor rights reduce spreads, they do not seem to matter for loan size and maturity. Overall, we show that variation in enforceability of contracts matters a great deal more to how loans are structured and how they are priced.We use data from 36 countries to examine how property rights affect loan spreads (over the London Interbank Offered Rate) in international bank loans. Banks charge higher loan spreads when property rights are weaker suggesting that recontracting and monitoring costs are larger in countries with weak property rights environments. The findings are robust to consideration of a large number of plausible macroeconomic and institutional factors. The findings are also robust to controlling for variation in observable risk characteristics of borrowers across countries. The effects are also economically large. If a country improved its property rights protection from the 33 rd percentile to the 67 th percentile, loan spreads would decline by 81 basis points.

Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong

We investigate the role of limit orders in the liquidity provision in a pure order-driven market. Results show that market depth rises subsequent to an increase in transitory volatility, and transitory volatility declines subsequent to an increase in market depth. We also examine how transitory volatility affects the mix between limit orders and market orders. When transitory volatility arises from the ask (bid) side, investors will submit more limit sell (buy) orders than market sell (buy) orders. This result is consistent with the existence of limit-order traders who enter the market and place orders when liquidity is needed. Copyright The American Finance Association 2001.

Good news, bad news and international spillovers of stock return volatility between Japan and the U.S.

Abstract We study the joint dynamics of overnight and daytime return volatility for the Nikkei Stock Average in Tokyo and the Standard and Poors 500 Stock Index in New York over the recent 1988–92 period. We extend the GARCH framework of Engle (1982) and Bollerslev (1986) to allow for asymmetric effects of negative (“bad news”) and positive (“good news”) foreign market returns shocks for volatility. Our evidence demonstrates that the magnitude and persistence of shocks originating in New York or Tokyo that transmit to the other market are significantly understated if this asymmetric effect is ignored. Implications for pricing of securities within those markets, for hedging and other global trading strategies and for regulatory policies within these financial markets are also discussed.

The Value of Durable Bank Relationships: Evidence from Korean Banking Shocks

Using a large sample of exogenous events that negatively affected Korean banks during the 19971998 period, we examine the value of durable bank relationships in Korea. We show that adverse shocks to banks have a negative effect not only on the value of the banks themselves, but also on the value of their client firms, and that this adverse effect on firm value is a decreasing function of the financial health of both banks and client firms. Our results are concentrated in the second half of the sample period when Korean banks experienced severe difficulties.

Investibility and return volatility

Abstract Unlike previous studies that examine how emerging market return volatility changes subsequent to stock market liberalization, this paper investigates the impact of investibility, or the degree to which a stock can be foreign-owned, on emerging market volatility. We find a positive relation between return volatility and the investibility of individual stocks, even after controlling for country, industry, firm size, and turnover. We also find that a highly investible emerging market portfolio is subject to larger world market exposure than a non-investible portfolio, suggesting that highly investible stocks are more integrated with the world and therefore more vulnerable to world market risk.

Stock Market Liberalization and the Information Environment

We document beneficial associations between openness to foreign equity investors and the information environment in emerging stock markets. Openness is reflected in legal, regulatory, and cross-listing events, the fraction of stock available to foreign investors, and the size of U.S. portfolio flows. We find that firm-specific information, analyst coverage, and value-added by analysts increase with openness to foreign equity investment while earnings management tends to decline. Large changes in earnings-related information variable are attributed to foreign analysts who increase their presence, activity, and contribution after openness increases. Across a detailed sample of Korean firms, however, such effects are dampened for firms that rate poorly on governance.

The profitability of index futures arbitrage: Evidence from bid‐ask quotes

Previous studies investigated the profitability of stock index futures based on transaction price data, and could overstate the frequency of arbitrage opportunities and size of arbitrage profits. This article obtains a data base for the Hong Kong index futures and index options market that contains both real‐time transaction prices and bid‐ask quotes; the article further examines the bias of identifying arbitrage opportunities based on transaction prices. The article finds the percentage of observations violating no‐arbitrage bounds is significantly reduced when bid‐ask quotes are employed instead of transaction prices. This suggests studies that implement arbitrage strategies based on transaction prices employ prices from the wrong side of the spread. This article finds a relationship between the frequency of violations (evaluated from transaction prices) and the size of bid‐ask spreads in the futures and options markets. This phenomenon indicates that a larger mispricing, which may arise when the bid‐ask spread is wider, does not necessarily imply profitable arbitrage opportunity.

Investibility and Return Volatility in Emerging Equity Markets

Unlike previous studies that examine how emerging market return volatility changes subsequent to stock market liberalization, this paper investigates the impact of investibility, or the degree to which a stock can be foreign-owned, on emerging market volatility. We find a positive relation between return volatility and the investibility of individual stocks, even after controlling for country, industry, firm size, and turnover. We also find that a highly investible emerging market portfolio is subject to larger world market exposure than a non-investible portfolio, suggesting that highly investible stocks are more integrated with the world and therefore more vulnerable to world market risk.

The Transmission of Pricing Information of Dually‐Listed Stocks

We use the daily opening and closing prices of eighteen dually-listed Hong Kong companies to investigate the transfer of pricing information between the Stock Exchange of Hong Kong (SEHK) and the London Stock Exchange (LSE). Evidence shows that (1) SEHK overnight returns respond significantly to change in LSE intraday returns, but the transmission process is not completed at the opening of the SEHK; (2) LSE overnight returns respond significantly to changes in SEHK intraday returns, but the transmission process is not completed at the opening of the LSE, either; (3) the impact is stronger moving from the LSE to the SEHK. This evidence indicates that information transfer runs in both directions and that most of the transmitted information continues to be processed throughout the following trading day (JEL G15). Copyright Blackwell Publishers Ltd 1999.

Does Increased Competition Affect Credit Ratings? A Reexamination of the Effect of Fitch's Market Share on Credit Ratings in the Corporate Bond Market

We examine two competing views regarding the impact of competition among credit rating agencies on rating quality: the view that rating agencies do not sacrifice their reputation by inflating firm ratings, and the view that competition among rating agencies arising from the conflict of interest inherent in an “issuer pay†model creates pressure to inflate ratings. Using Fitch’s market share as a measure of competition among rating agencies and controlling for the endogeneity problem caused by unobservable industry effects, we find no relation between Fitch’s market share and ratings, suggesting that competition does not lead to rating inflation.