Taek Ho Kwon, Jong Won Park, Uk Chang, "The Effect of Side Car on Stock Market", The Korean Journal of Financial Engineering, 2005.

A Firm’s Growth and its Diversification Effects

A firm’s diversification is closely related with the firm’s growth strategies. While the sales growth of a firm affects the computation result of diversification index which reveals the degree of the firm’s diversification. This paper tests the diversification and firm value relations considering a firm’s sales growth. The test results show that the negative effect of diversification comes from the diversification conducted by firms that have been experienced low (negative) sales growth. On the contrary, the diversifications of the high sales growth firms had a tend to be positively related with firm value. These results support the notion that sales growth could play a big role in the analyses of a firm’s diversification effect. The paper also tests whether there is any difference in the test results through measuring the diversification index. The test results confirm that the diversification effect could be different by digits adopted to classify a firm’s sales item. Empirical results of the paper remain robust to different model and sample specifications.

Variability of Foreign Exchange Exposure and its Relations to Firm Value

The effect of foreign exchange rate changes on a firm’s operations has been discussed from the perspective of foreign exchange exposure coefficients. In general, foreign exchange exposure coefficients were estimated under the assumption of have a constant coefficient during the estimation periods. Previous studies, however, have documented evidence supporting the theory of time-varying exchange exposure. Time-varying exchange exposure implies that exchange exposure has variability. We developed 2 competing hypotheses on the variability of exchange exposure on firm value. First, the time-varying exchange exposure would affect firm value negatively due to the difficulty in managing the foreign exchange exposure). When
the exchange exposure changes periods, it is hard for investors to fix the optimal hedge ratio to manage the exchange risk. Conversely, the time-varying exchange exposure would affect firm value positively due to the information effect included in the time varying exposure, because the time-varying exchange exposure might be interpreted as a firm doing international business actively If this information effect outweighs the inefficient hedging, time-varying exchange exposure would induce an increase in firm value. This study examines the relations of the variability of the exchange exposure and firm value. Test results show that the variability of the exchange exposure is positively related with firm value. Yet, the relations disappear when a firm’s idiosyncratic volatility is included in the estimation equation. Further analysis reveals that the variability of exchange exposure could be a factor that explains the firm’s idiosyncratic volatility. This study suggests that the variability of the exchange exposure should be considered in the analysis of the effect of the exchange rate changes on the management of firms. Test results also show that the variability of the exchange exposure could explain some part of a firm’s idiosyncratic volatility.

Bae, Sung C., Hyeon Sook Kim and Taek Ho Kwon(2016), Foreign Currency Debt Financing, Firm Value, and Risk: Evidence from Korea Surrounding the Global Financial Crisis, Asia-Pacific Journal of Financial Studies, 45(1), 124-152.

The Comparative Advantage of Intermediate Goods Trade in East Asia and Free Trade Agreement

This study analyzes the degree of dependency and comparative advantage of each country for intermediate goods trade in East Asia, which predicts the comparative advantage of the intermediate goods trade and fragmentation in East Asia when the FTA arrangement in East Asia is implemented. The results are as follows. First, the share of intra-regional trade in the intermediate goods in East Asia has increased over time, implying the deepening of interdependency in intermediate goods trade within the East Asia. Second, Korea is a net exporter in intermediate goods trade for China and ASEAN, whereas it is a net importer for Japan. Japan is a high net exporter for all East Asia, while China is a net importer for Korea, Japan and ASEAN. If FTA arrangement in East Asia is implemented, Japan and Korea will be key suppliers of the intermediate goods for East Asia, while China and ASEAN will play a role of the manufacturing factory through the import of intermediate goods. Third, Korea has a comparative advantage in intermediate trade of electric and electronics and transport vehicle industry in East Asia. Japan has a comparative advantage in all of electric and electronics, transport vehicle, precision instrument, general machinery industry, whereas China has a comparative advantage only in electric and electronics intermediate trade in East Asia. The intra-industry trade of the intermediate goods in precision instrument, general machinery industry is expected to grow among Korea, apan and China.

Kwon, Taek Ho, Foreign Exchange Risk Management of Korean Manufacturing Firms, 두남, 2016.

Foreign Exchange Rate Exposure and Investor Sentiment

Using the sample of the KOSPI firms in Korea Exchange during 2006～2012, this study examines the effect of investor sentiment of stock market on the estimated exchange exposure coefficient of firms. The results from the augmented market model show that exchange exposures are significantly different when we included investor sentiment in the estimation model. The determinants of the exposure differences were the variables including degree of financing in foreign currency, operating profit, R&D expenses, Chaebol affiliation, and firm size, which are different from the determinants of exposures based on augmented market model. Our test results also show that the size of firms and the direction of exposures of firms are closely related to the effect of investor sentiment on the coefficients of exposures. The results of our paper suggest that investor sentiment have to be considered properly in the estimation of the coefficients of foreign exchange exposures.

This paper reviews previous studies on the foreign exchange exposures of Korean firms, and

attempts to draw implications for researchers and practitioners. Studies on the corporate

exchange exposures in Korea began from early 1980s. Early researchers were interested in how

to define exchange rate risks and how to measure exchange exposures. Since then, a large

number of studies have been devoted to estimating exchange exposures, and analyzing their

characteristics. Especially, the Asian Financial Crisis in 1997 contributed to re-evaluating the

sense of exchange exposures in corporate management. After Korea’s adoption of floating exchange

rate system, researches focus on estimation of exchange exposures, and thereafter the activities

to manage exchange exposures have sharply increased. Meanwhile, derivatives trading of Korean

firms began to appear in accounting reports from 1999, and quite a few studies tested the effect

of derivatives trading on the exchange exposure management. Recently, a few studies are trying

to analyze exchange exposures with greater precision by dividing the exchange exposures into

expected ones and observed ones. Those studies examine the relatedness of the difference of

exposures to the effect of exposure management activities. Our review of previous studies shows

that Korean firms have been shown to be exposed to exchange rate changes and that they have

made efforts to manage their exposures. Not a few studies report that exchange rate changes

affect firm value with time lag, and/or that the effect of exchange rate changes on firm value

gets along asymmetrically with the direction of exchange rate changes. Previous studies also show

that Korean firms need to make approach systematically to estimating their exchange exposures.

Kwon, Taek Ho(2014), "Korean Firms’ Foreign Exchange Exposure and its Management: A Literature Review", Korean Management Review, 43(6), 2011-2037

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