Sungkyu Kwak

The Real Output Losses Associated with Modern Banking Crises

This study investigates the real output losses associated with modern banking crises. We find a remarkable diversity of experience. In a number of instances banking crises have not been associated with any significant reduction in the growth of real, per capita GDP. Often, this has been the case in mature and developed economies. On the other hand, estimated output losses are extremely large for some other countriesÑamounting to several years of lost GDP. Interestingly, such large losses can be associated with banking crises that were designated as non-systemic. Our sample mean and median output loss estimates are also big. For the average sample country, the estimated present discounted value of crisis-related output losses is bounded between 63% and 302% of real, per capita GDP in the last year before the crisis onset. Average loss estimates are this large primarily because we find evidence that post-crisis economic slowdowns often persist long after the crisis is officially over. Such delayed costs have been largely overlooked in previous empirical work and resultantly our loss estimates are much larger than those that have appeared elsewhere.

IPO valuation and insider manipulation of R&D

Purpose - The purpose of this paper is to examine the effects of R&D manipulation on stock valuation for periods around IPOs. Insider manipulation is the difference in actual R&D change minus predicted R&D change where a negative difference indicates R&D underinvestment. Design/methodology/approach - This study is designed to build on prior IPO research that has found reduced R&D expenditures when insiders lower their ownership. The paper derives an R&D manipulation variable that measures underinvestment in R&D. This variable is used in a regression methodology to test its influence on: IPO stock valuation at various points in time and post-IPO price changes relative to the offer price. Findings - The paper discovers that greater underinvestment in R&D is associated with greater values during the IPO stock valuation process. This association is reversed when the paper looks at short-term valuation based on market prices. Only for bubble period IPOs do the paper finds poorer valuations for the long-term. Larger insider ownership decreases lead to poorer valuations regardless of the period of occurrence. Greater R&D underinvestment and insider ownership decreases both lead to less underpricing. Research limitations/implications - Like prior research, the paper assumes that knowledge about the change in R&D is known at the time of the offering. Interpretations for long-run results can be tenuous due to unexpected changes that occur over time. Practical implications - Investors should note that managers are able to set higher offer prices when they inflate earnings by underinvesting in R&D. Buying at an inflated offer price with R&D manipulation leads to losses in the aftermarket with these losses associated with IPOs that occur during a bubble period. Social implications - Misrepresentation during the IPO valuation process affects those who buy shares at inflated prices. This raises ethical questions about the behavior of those involved in the issuance process. Originality/value - This study is unique in testing how R&D manipulation and changes in insider ownership proportions impact the: IPO valuation process, post-IPO valuation, and changes in the stock price over time relative to the offer price.

Insider signaling and seasoned equity offerings

Purpose - The purpose of this paper is to examine the impact of insider ownership decreases on stock returns for firms undergoing seasoned equity offerings (SEOs). Design/methodology/approach - Insider data were gathered for firms undergoing SEOs and this information used to compute the insider ownership percentage decreases caused by the SEOs. These insider percentage decreases and standard compounded abnormal return methodology were used to test signaling theory. Findings - It was discovered that the short-run and long-run stock returns accompanying SEOs are not consistent with what signaling theory predicts. In particular, for greater decreases in insider ownership percentages, a superior market response for both short-run tests and long-run post-SEO tests was often found. Research limitations/implications - Prior research has not examined how the change in insider ownership caused by a corporate event influences stock returns. Future research can build on the univariate tests by examining the impact of insider ownership within a multivariate framework. Practical implications - Investors cannot profit by following the behavior of insiders by selling shares in companies where insiders lower their ownership percentages. This is because insiders appear to have personal agendas that they follow when decreasing their holdings. Originality/value - This is the first study to examine how changes in insider ownership caused by a significant corporate event affect stock returns. The findings of this empirical examination challenge signaling theory as regards insider knowledge, the ability of insiders to convey their privileged knowledge (if it exists), and the capacity of outsiders to decipher and act on insider actions.

Hedge funds vs SEO firms: a comparative analysis

Purpose The purpose of this paper is to determine if hedge funds perform poorly as claimed by more recent research. The authors find hedge funds perform well from 2001 to 2013 when compared to sample of firms known to experience superior performance, namely, a sample of seasoned equity offerings (SEOs). Design/methodology/approach This paper uses a portfolio approach in comparing the performance of hedge funds and SEO firms. Other comparisons involve a number of common methodologies used to compute and analyze short-run and long-run returns. Findings Contrary to a growing and prevalent belief, the paper offers evidence hedge funds as a whole have performed well for a recent 13-year period. This finding includes periods up to six years around SEO announcement months. Research limitations/implications This paper is limited to examining monthly returns for a portfolio of hedge funds. This limitation led to incorporating a portfolio approach. Practical implications The findings suggest that a portfolio of hedge funds are an important investment consideration. This consideration has practical implications because investing in a portfolio of hedge funds has become more available for all investors in recent years. Social implications Society can be enhanced as this paper helps future investors make optimal investment decisions. Originality/value This paper adds to the hedge fund research by being the first paper to compare the performance of hedge funds with that for firms undergoing an important corporate event. The findings are new and can impact investment decision making.

SEO valuation and insider manipulation of R&D

We examine a sample of 674 SEOs from 1999-2010 where reduced R&D spending is significantly associated with the lowering of insider ownership proportions. With this association established, we derive an R&D manipulation variable measuring underinvestment in R&D. We add to the SEO-R&D literature by examining the relation between R&D underinvestment and common stock valuation around SEOs. In contrast to the IPO research, we do not find that underinvestment in R&D leads to greater SEO stock valuations during the offer price setting process. Like the IPO research, we find that underinvestment in R&D leads to lower stock valuations for short-run post-offering tests. In contrast to the long-run IPO results, we find a significant association between R&D manipulation and stock valuation for long-run post-offering tests where underinvestment in R&D is associated with lower stock valuations. We also find the five % owner group for SEOs is important in explaining R&D manipulation and discover that underpricing for SEOs is not related to R&D manipulation. These latter two findings are different from IPOs. In conclusion, SEOs can be quite different from IPOs when examining the association between the insider manipulation of R&D and stock valuation.

Inside ownership and leverage increases

We examine the wealth impact of inside ownership on firms announcing leverage increases by issuing senior securities that retire junior securities. We find the market response to leverage increase announcements is influenced by the percentage of inside ownership. We show that firms with greater inside ownership percentages have greater market responses to the positive news conveyed by leverage increase announcements. Regression analysis indicates that inside ownership percentage is the factor best accounting for the market response. The applicability of this finding should hold throughout the world where inside holding percentages are known at the time of the leverage increase announcements.