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2005년~2010년 기간 중, 계열사 간에 매출 또는 매입 관련 거래를 한 상장기업을 대상으로 대규모기업집단과 중견기업집단으로 구분한 후, 계열사 간 거래가 기업성과에 미치는 영향을 통해 계열사 간 거래의 효율성과 터널링 여부를 실증 분석했다. 또한, 지정기준 변경으로 대규모기업집단에서 중견기업집단으로 소속이 변경된 상장회사의 계열사 간 거래가 기업성과에 미치는 영향의 변화를 분석해 규제정책의 실효성을 검토했다. 그 결과, 규제대상인 대규모기업집단의 계열사 간 거래는 기업성과에 유의한 양의 영향을 주어 효율적 거래이론과 부합했다. 반면, 규제대상이 아닌 중견기업집단의 계열사 간 거래는 오히려 비효율성과 터널링으로 추정되는 결과를 보였다. 한편, 규제대상인 대규모기업집단에서 규제 받지 않는 중견기업집단으로 소속이 변경된 기업의 계열사 간 거래는 기업성과에 유의한 음의 영향을 주는 것으로 나타났다. 종합하면, 중견기업집단 소속 기업과 대규모기업집단에서 중견기업집단으로 소속이 변경된 상장사의 계열사 간 거래가 기업성과를 낮추는 비효율성을 보였다. 따라서 대규모기업집단 지정제도에 근거한 계열사 간 거래 자체의 사전적․일률적인 규제방식보다 중견기업집단까지를 포함해 계열사 간 거래의 부당성 판단에 기초한 사후적・개별적인 규제방식으로의 제도적 보완이 필요하다.
This study analyzes the efficiency of internal business transactions by comparing the effect of intra-group sale and purchase transactions on business performance, using listed companies that engaged in transactions between sales-related subsidiaries from 2005 to 2010 as subjects. We classify large and medium business groups based on whether a business group is on the mutual investment restriction list, which the Fair Trade Commission announces annually, and compare the transaction behavior difference and efficiency of the transaction effect. To directly review the change in the transaction performance of companies whose affiliations have changed from large to medium business groups due to changes in the large-size, business-group designation criteria, we perform an additional panel analysis using a business-group affiliation change dummy variable (CHANGE). By analyzing business performance using business-group designations that are related to government regulations, we investigate the effectiveness of the current regulatory policies. The main empirical analysis is based on a model that applies an affiliation dummy variable (GROUP). Our analysis compares the transaction efficiency between subsidiaries for each business-group designation. When the variables included in the regression model are considered to be corporate characteristic variables that can interact as factors to determine the size and behavior of the transactions between subsidiaries, it is possible for the internal transaction ratios (SR, PR, SPR) to become endogenous explanatory variables. Hence, we use the results of the two-stage least squares estimation method to control the endogeneity problem. We use the average value of the internal transaction ratio of industry, the number of business group-affiliated subsidiaries, and industry correlation as the instrumental variables for estimating the internal transaction ratio variables. The results are as follows. First, according to the regression analysis of the effect of sale and purchase transactions between subsidiaries on firm performance, the transactions between subsidiaries of a large business group subject to regulations have a significant, positive impact on business performance, and thus support the efficient-transactions hypothesis. In contrast, we find a significant negative correlation between the intra-group transaction ratio and firm performance in unregulated, medium-sized business groups. This evidence is consistent with the tunneling and inefficiency hypothesis, which supposes that large Korean business groups have used transactions with affiliates to illegally transfer owner’s wealth and management rights. Interestingly, we can confirm that the inefficiency of unfair internal transactions is observed in medium business groups rather than in large business groups. This is contrary to common belief and the findings of previous studies on Korean Chaebol firms. Second, according to the results of the analysis of the intra-group transactions effect before and after the point of regulation change based on using a business-group affiliation change dummy variable, the transactions between subsidiaries of a company for which the affiliation has changed from a large business group to an unregulated medium business group have a significant negative impact on firm performance. We interpret this result as follows. The change in affiliation of a regulated business group to a non-regulated business group has a significant negative impact on the effect of transactions between subsidiaries. This study contributes to the literature on business groups by comparing the firm performance between two groups, before and after regulation change. In summary, differences in the efficiency of transactions between subsidiaries are revealed based on their affiliation with a large business group and the change of affiliation to a medium business group. In other words, the efficiency of internal business transactions depends on whether the firm belongs to large business group or not, and the business group’s regulation designations are very important. The findings of this study thus provide the following suggestion for government policies: rather than the ex-ante, uniform method for regulating transactions between subsidiaries based on the large business group designation system, institutional supplementation is needed in the form of an ex-post regulation method based on the expansion of the target range for regulation and judgment of appropriateness. If restriction is uniformly applied to all transactions between subsidiaries based on the large business group designation system, it may constrict even efficient business management activities. Hence, the appropriateness judgment criteria for evaluating the efficiencies of individual transactions between subsidiaries are needed, and rather than the method of regulating ex-ante internal transactions outright, ex-post regulation based on the actual content of individual internal transaction is desirable. It is necessary to adjust a range of regulated firms and to complement monitoring systems for unfair trade practices, based on ex-post evaluations.
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일본에서는 1990년대 후반부터 상법개정과 주식교환제도 및 주식이전제도의 도입 등에 의해 자산매각의 방법이 다양화되어 자발적인 자산매각이 활발하게 이루어지게 되었다. 이에 본 연구는 기업환경 변화 이후 일본기업의 자발적 자산매각 공시효과를 분석하고 공시효과에 영향을 미치는 요인을 실증분석 하였다. 특히, 정보비대칭을 완화시키기 위하여 자산매각이 이루어지는 가를 검증하였다. 먼저, 자산매각의 공시효과는 통계 적으로 유의한 양(+)으로 나타났다. 이 후 매각자금의 사용목적과 재집 중 목적, 자원의 효율성 증대목적 그리고 정보비대칭 완화목적 등의 하위 표본으로 분류하여 분석하였다. 결과는 다음과 같다. 첫째, 매각자금의 사용목적에 따른 유의한 차이를 발견할 수 없었다. 둘째, 재집중 목적과 그 외의 목적으로 분류한 표본에서도 유의한 차이가 나타나지 않았다. 셋째, 자산매각의 공시효과는 매각기업에서만 존재하는 것으로 나타났다. 넷째, 자산매각을 실시한 기업은 실시하지 않은 대응기업보다 매각실시 전 정보비대칭이 유의하게 높았고 자산매각 후 정보비대칭 정도가 줄어들었다. 횡단면회귀분석 결과에서도 누적초과수익률은 정보비대칭 정도가 크고, 매각 전 주식성과가 나쁠수록 높은 것으로 나타났다. 또한 기업의 투자와 자산매각 대금의 관계에서도 통계적으로 유의한 양(+)의 결과를 얻었다. 이상의 결과는 기업의 자산매각이 정보비대칭과 관련이 있음을 시사하고 있다.
This study examines the voluntary asset sales that took place in Japan from 2000 to 2007. Asset sales increased rapidly after the introduction of a new stock swap and transfer scheme under the Commercial Code Revision in the late 1990s. The unwinding of cross shareholding also forced managers to sell underperforming divisions to maximize shareholder wealth. The study investigates the effect of asset sales announcements and analyzes the motivation for asset sales. In particular, it verifies that information asymmetry influences asset sales. Based on asymmetric information, management can observe the performance of each division, but markets can only observe the total performance of a diversified firm. Hence, markets are likely to underestimate a firm’s value. When firms are undervalued, they not only resort to selling overvalued assets for funds, but they also receive a proper evaluation by providing clearer financial information on undervalued assets. This suggests that the announcement of asset sales is positively related to the stockholder’s wealth and mitigates the information gap. The results are as follows. This study uses 262 voluntary asset sales and a market model to investigate the announcement effects. We find that the announcement of asset sales is significantly positive for abnormal returns of 1.09% per day (-, +1). This suggests that asset sales convey information on corporate fundamental values if the management has access to complete information and attempts to evaluate the wealth of existing shareholders. In addition, we analyze the relationship between the cumulative abnormal return (CAR) and motivation of asset sales. Hite et al. (1987) suggest that management only operates assets for which they have a comparative advantage and sells inefficient assets. This is the so-called efficient hypothesis of asset sales. John and Ofek (1995) report that returns are higher, and the firm experiences increased operating performance, when asset sales lead to a more focused firm. This is called the focus hypothesis. However, Lang et al. (1995) argue that asset sales are used to raise capital and show that announcement returns depend on the use of the proceeds, and positive returns only occur when proceeds are paid out to creditors or shareholders. They call this the financing hypothesis. The main empirical results are not consistent with the above three hypotheses. First, to test the financing hypothesis, the entire sample is classified into two subsamples: the payout sample (54 asset sales) and there investment sample (146 asset sales). The abnormal returns of payout firms are not significantly different than those of reinvestment firms. This result is not consistent with the financing hypothesis, which asserts that an agency problem, through management’s discretion, affects asset sales return. Second, we find that the sample has 118 focused asset sales and 82 non-focused asset sales. The CAR (-1, 1) of focused firms is 0.17%, which is 1.35% lower than that of the other firms, but the difference is not significant. This result also does not support the focus hypothesis. Third, according to the efficient hypothesis, management who inefficiently operate their assets will transfer it to others who may operate it more efficiently. We use Tobin’s q as a proxy variable representing firm efficiency. Tobin’s q for sellers is not lower than that of buyers. In addition, the median CAR of the buyer is significantly negative. These results are not consistent with the hypothesis that the positive effect of asset sales is due to improved efficiency. Fourth, we find that the degree of information asymmetry of asset sales firms is significantly higher than that of matching firms. We identify matching firms using the methodology developed by Barber and Lyon (1996). The degree of information asymmetry significantly decreases after asset sales. This suggests that information asymmetry is related to asset sales. Furthermore, in cross-sectional regressions of CAR (-3, +3), the coefficient of information asymmetry is significantly positive, whereas the coefficients of the debt-pay dummy and focus dummy are non-significantly negative. This also supports the notion that information asymmetry influences asset sales. The results of the other control variables are as follows. Firm size is not related to the announcement effect. Tobin’s q is significantly positive and market return is significantly negative, suggesting that positive market response is due to the availability of information on which firms are undervalued. The coefficients of ROA and leverage are statistically insignificant, which does not support the findings of Hite et al. (1987) and Lang et al. (1995). Finally, we analyze whether asset sales are associated with investments and find that the sensitivity of investments and the proceeds of asset sales are positive and statistically significant. This is consistent with the view that firms improve their market value using asset sales that reduce information asymmetry.
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본 연구는 국내 증권회사 소속 애널리스트 투자의견 변경 이전에 이루어지는 주식거래에서 기관투자자의 단기적인 정보우위 여부를 검증한다. 2001년에서 2010년까지의 기간 동안 한국거래소 유가증권시장에 상장된 기업 중 애널리스트가 투자의견을 변경한 기업을 대상으로 분석을 진행한 본 연구의 주요 결과는 다음과 같다. 투자의견 상향조정 기업의 경우 관련 정보의 신속한 반영으로 상향조정 이전에 주가가 상승하는 반면, 하향조정 기업의 경우에는 여러 가지 시장 제약에 따른 부정적인 정보의 전달 지연으로 하향조정 이전에 주가가 하락하지 않는다는 결과를 도출하였다. 또한, 국내 매수측(buy-side) 기관투자자는 기업에 대한 우수한 분석능력을 바탕으로 사전에 애널리스트의 투자의견 변경 정보와 동일한 방향으로 거래를 수행하여, 이들의 거래불균형은 투자의견 변경 시 주식수익률과 정(+)의 관계가 있다는 것을 발견하였다. 반면, 개인투자자와 외국인 투자자는 애널리스트 투자의견 변경 정보와 무관하거나 반대의 방향으로 거래를 행하고 있다. 이러한 결과는 애널리스트 투자의견 변경일 이전에 기관투자자가 정보우위를 통해 방향성 있는 거래를 수행한다는 본 연구의 주장과 일치한다.
Analyst reports, which contain views on whether to buy or sell particular stocks for clients, usually include earnings forecasts, long-term growth forecasts, and /or stock recommendations. In general, analysts’ stock recommendations fall into one of five categories: strong buy, buy, hold, sell, or strong sell. Analysts revise their recommendations by upgrading or downgrading them when needed. The recommendation changes are commonly regarded as useful information and lead to changes in stock prices. Investors expect analysts to provide objective, unbiased, and accurate equity research reports based on the best of their knowledge. However, the literature has accumulated evidence that sell-side analysts’ forecasts are tainted and not objective. Sell-side analysts working for investment bank shave pressure to provide optimistic recommendations on firms that can provide business to the investment banks. Analysts working in brokerage houses also have pressure to provide optimistic recommendations to attract trading revenues because upgrades attract more business than downgrades due to restrictions on short selling. Consistent with this conflict of interest, previous literature has found that analysts affiliated with investment banks and brokers produce more optimistic earnings and are more likely to give buy recommendations. In addition, if some investors have access to the contents of upcoming analysts’ reports in advance, then they can take advantage of the superior information contained in those reports. Irvine, Lipson, and Puckett (2007) test the “tipping hypothesis” based on data on initial recommendations and document that brokerage firms provide the contents of affiliated analyst reports to important clients who generate large trading commissions before the information becomes public. We extend this line of research by examining the daily trading data on Korean stock recommendation changes from 2001 to 2010. The advantage of using Korean data is that we can obtain the daily trading volume by investor types for all stocks traded on the Korean Stock Exchange (KSE) and on the Korea Securities Dealers Automated Quotation (KOSDAQ). Our sample consists of 1,708 upgrades and 2,035 downgrades for 223 unique industrial firms. By analyzing investors’ trading data on the recommendation changes of analysts, we examine whether information asymmetry exists among different groups of investors, individuals, domestic buy-side institutions, and foreign investors. Unlike individual investors, institutions frequently communicate with brokerage firms, investment banks, and asset management firms to acquire information, which makes it possible for them to access analysts’ reports. In addition, institutions are more capable of acquiring and processing information than individuals. We thusconjecture that domestic buy-side institutions are better informed than individuals on upcoming recommendation changes. We also investigate whether foreigners have an informational advantage compared to domestic investors on the upcoming recommendation changes. Previous studies provide inconclusive evidence that foreigners perform better than domestic investors in trading stocks. Using Korean data, Choe, Kho, and Stulz (2005) find no evidence that foreign investors perform better than domestic institutions. Our analysis shows that stock prices increase before analysts’ recommendation upgrades, whereas upcoming downgrades do not cause stock prices to decrease before the information release. We then analyze the standardized trade imbalance (STI) to examine the difference in trading activities by individuals, domestic institutions, and foreigners before recommendation changes. Over the period of days -5 to -1, the STI by domestic buy-side institutions is 0.43 before upgrades and -.35 before downgrades, and the STIs are significantly different from zero at the 1% confidence level. However, the STIs by individuals and foreigners before recommendation changes are not statistically different from zero. These results indicate that domestic buy-side institutions buy (sell) stocks in anticipation of an upgrade (downgrade), whereas individual investors and foreign investors do not trade stocks based on information. We also find that trade imbalances by the institutions are positively related to abnormal returns over days 0 to 5 after the announcements of recommendation changes. This evidence is consistent with our argument that domestic buy-side institutions take advantage of their superior information on analyst recommendation changes over the short-term. Our paper adds to the literature by providing evidence of the short-term informational advantage of domestic buy-side institutions over other investors on analysts’ recommendation changes based on high-frequency data from Korea. The evidence shows that domestic institutions predict the direction of analysts’ recommendation changes and reflect this information in their stock trading, which is indirectly consistent with Irvine, Lipson, and Puckett’s (2007) finding. We also contribute to the growing literature on foreign investors’ trading in emerging markets. We find that foreign institution trading is not characteristic of analysts’ recommendation changes and does not predict stock returns. This shows that foreign institutions do not have an informational advantage compared to local institutions on specific events.
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다수은행 거래관계는 자금조달처를 다각화하여 관계금융의 홀드업 문제를 완화할 수 있으나, 조정실패 문제의 원인이 되거나 대출 갱신시 재협상 리스크에 노출될 수도 있다. 따라서 최적의 차입구조는 다수은행 거래관계의 조정실패 문제와 단일은행 거래관계의 홀드업 문제 사이에 균형을 취하는 것이다. 이를 위해 기업의 입장에서는 전략적으로 다수은행과 거래관계를 형성하면서 동시에 하나의 관계은행에 차입을 집중할 유인을 가진다. 본 연구의 목적은 다수은행 거래관계이면서 비대칭적인 차입 패턴을 보이는 기업들의 특성을 알아보는 것이다. 이를 위해 2006~2011년 사이 NICE평가정보(주)의 KISVALUE 시스템에 등록된 비금융기업들을 표본으로 하여 분석해 보았다. 그 결과 첫째, 차입 기업의 정보가 불투명할수록, 자산의 청산가치가 높을수록, 리스크가 작고 수익성이 좋은 기업일수록 차입집중도가 높은 경향을 보였다. 둘째, 은행 규모, 수익성, 자본적정성 등 관계은행의 특성은 차입집중도에 거의 영향을 미치지 않았다. 이는 은행별로 여신 의사결정 프로세스가 큰 차이가 없기 때문에 나타난 결과로 추측된다. 셋째, 경기가 좋을수록, 대출시장의 경쟁이 낮을수록 차입집중도가 높게 나타나 시장특성도 차입집중도에 중요한 영향을 미치고 있음을 알 수 있었다.
It is generally observed that firms maintain relationships with multiple banks. Although most studies investigating the phenomenon of multiple banking relationships assume more or less equal borrowing weights among the banks, in practice creditor concentration or asymmetry in borrowing occurs, by which we mean that a firm tends to concentrate its borrowing on one main bank and to fill the remaining loan necessity from other arm’s-length lenders. A firm can benefit from establishing a close, long-term relationship with a single bank. For example, studies report evidence that a close relationship improves accessibility to funds and reduces the cost of capital and collateral requirements (Petersen and Rajan, 1994; Berger and Udell, 1995). However, the downside of a close relationship with a single bank is the tendency that a firm may find itself in a disadvantageous position for loan bargaining with the bank, which has acquired monopolistic information concerning the firm’s true credit worthiness. This is called the‘hold-up problem’, which can be a significant constraint, at least for informationally-opaque firms. According to von Thadden (1992), multiple banking relationships may be a solution to the hold-up problem because they create competition among banks, and thus prevent one bank from extracting the monopolistic rent when offering the loan. Multiple banking relationships are reported to reduce bankruptcy probability and the costs resulting from actual bankruptcy, and thus limit a firm’s potential financial distress. Finally, multiple relationships may reduce a firm’s liquidity problems by spreading the risks of liquidity problem of banks themselves. However, the negotiations for loan renewals are more complicated for multiple banking relationships, and when a firm fails and is liquidated, the liquidating value of the firm may be reduced due to the possible failure of coordination among banks (Bolton and Scharfstein, 1996). Considering the above discussion, we assert that creditor concentration (or asymmetric borrowing) with multiple banking relationships allows a firm to overcome the hold-up problem, as well as the possible failure in coordination among many banks. In other words, creditor concentration is a strategic solution for a firm to strike a balance between a single long-term relationship and multiple bank relationships. This paper investigates the influence of variables related to firm, bank, and market characteristics on the degree of creditor concentration in the Korean bank loan market. We use a data set from firms registered on the KISVALUE system of the NICE Information Service from 2006 to 2011. We use a Heckman selection model, and three proxies for measuring the degree of creditor concentration are included in the analysis: the Herfindahl-Hirschman Index (HHI), the largest financing share (CR1), and the Share of Inequality Index (SII). In the first stage of analysis, we estimate a probit for the probability of multiple banking relationships. In the second stage, we estimate the determinants of the degree of concentration, which is conditional on borrowing from multiple lenders. In this study, we find evidence of stronger creditor concentration for firms with more opaque information, more liquidation value of assets, and lower leverage. In addition, creditor concentration intensifies when a firm is more profitable and less risky. Regarding main banks’characteristics, we find that variables, such as bank size, capital adequacy, and bank ROA, do not significant explain creditor concentration. However, the number of employees to total loans, which can be viewed as a proxy for monitoring costs, is negatively related to creditor concentration. Market conditions are found to influence creditor concentration: there is evidence of stronger creditor concentration during boom times, which seems to be related to the tendency of firms to disperse loans to avoid the liquidity problem during recessions. In addition, a weaker creditor concentration is found in more competitive banking environments, during which banks offer better loan conditions, resulting in more dispersed loans among banks. We divide the sample into SMEs and large firms to examine asymmetric bank borrowing patterns. We find that SMEs display highly concentrated borrowing for the firms with more opaque information, higher liquidation value of assets, lower leverage, more profitable business, and better credit rating. These results are similar to those from the previous analysis of the full sample. However, the relations are weak for large firms, which have weak incentives to make strategic decisions on borrowing allocations because they have various alternative financing sources instead of bank loans, such as issuing stocks or bonds. Next, we analyze whether there is any difference in firms’ borrowing behavior during the financial crisis. The impact of firm and market characteristics on the degree of concentration in borrowing during the financial crisis is weaker than that during the normal period. We conjecture that the firms' strategic decisions are limited by the banks because of their strict lending attitude during the financial crisis. Taken together, these results indicate that creditor concentration is attributed to firms' strategic decisions on balancing the holdup problem of relationship lending with the coordination failure of multiple lending. In particular, SMEs behave more strategically relative to large firms. In this way, creditor concentration allows the borrower to retain some of the benefits of long-term relationship lending as well as to enjoy the insurance effect against liquidity risks originating from the relationship lender.
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본 연구에서는 국내 기업의 CDS(Credit Default Swap) 스프레드 자료를 이용하여 Pan and Singleton(2008)의 모형을 실증분석 하였다. 실증분석에 앞서, 모형가격 계산 방법론으로써 유한차분법의 적용법을 탐색하였다. 유한차분법 적용을 위한 몇 가지 가정에도 불구하고, CDS 거래의 실제를 잘 반영한 몬테칼로 시뮬레이션의 결과와 크게 다르지 않았다. 또한, 120×120 격자를 이용한 유한차분법은 실증분석을 하기에 적절한 오차와 속도로 이론가격을 계산할 수 있었다. 이러한 유한차분법을 이용하여 2006년 1월부터 2012년 11월까지의 기간 동안 국내 19개 기업의 CDS 기간구조를 최우추정 하였다. 추정된 모수는 Q-측도와 P-측도 하에서 상당히 다른 양상을 나타내었다. 두 측도 하에서의 부도확률을 계산한 결과, 투자자들은 Q-측도 하에서 더 높은 부도확률을 평가하고 있음을 확인하였으며, 이는 미래부도확률의 불확실한 변화에 대한 보상인 곤경 위험 프리미엄을 요구하는 것으로 해석된다. 또한, CDS 스프레드를 분해하여 곤경 위험 프리미엄을 계산한 결과, 평균적으로 42%의 스프레드가 곤경 위험에 대한 보상임을 확인하였다. 마지막으로, 곤경 위험 프리미엄의 결정요인을 분석한 결과 국내 변수로는 한국 외평채 CDS의 곤경프리미엄, 글로벌 변수로는 VIX(Volatility Index)가 각각 곤경 위험 프리미엄의 상당부분을 설명하는 것으로 드러났다. 이러한 결과들은 국내 기업의 곤경 위험 프리미엄은 국내 및 국외의 위험회피성향에 크게 영향을 받고 있음을 시사한다.
We investigate the term structures of corporate credit default swap (CDS) spreads in the Korean market based on Pan and Singleton’s (2008) model. To this end, we first consider an algorithm of numerical methods to calculate the theoretical price of CDSs. Specifically, we consider the finite difference method (FDM) and Monte Carlo simulation, and then, we examine the time efficiency and accuracy of the FDM. Monte Carlo simulation might be an accurate way to calculate the model price but it is time-consuming and not appropriate for estimating the term structure in our empirical study. In contrast, our analysis shows that the FDM meets our empirical goal in terms of error and speed. In particular, we use the Crank-Nicholson FDM with a 120×120 grid in our empirical analysis, as it performs relatively well in terms of speed and accuracy. Next, by employing the suggested FDM, we estimate the default probability implicit in the term structure of the CDS spreads for 19 domestic firms over the sample period from 2006 to 2012. We use the ML estimation for our econometric framework, and we estimate the 1-year, 3-year, and 5-year CDS spreads by assuming that the spread of CDSs maturing in three years is observed without error. Our estimation reveals that investors require a significant amount of premiums for bearing the risk of future variation in intensity, defined as the distress risk premium (DRP), when they invest in CDSs. We verify the argument in several ways. First, the ML estimates based on the Q-measure are very different from those based on the P-measure. The ML estimates imply that investors view the intensity dynamics more negatively under the Q-measure than under the P-measure. This result in the Korean corporate CDS market supports the finding of Pan and Singleton (2008) in two emerging sovereign markets. To take a deeper look at the significant difference between the Q- and P-dynamics of intensity, we next compute and examine the default probabilities within five years with the estimated parameters and implied intensity under both the Q- and P-measures. The results show that the Q-probability of default is much higher than its P-counterpart, implying that investors require premiums by adding more probability on real default probability. Finally, we directly calculate the amount of DRP to see how much it accounts for CDS spreads. In doing so, we follow the methodology first suggested by Pan and Singleton (2008) and then employed by Longstaff, Pan, Pedersen, and Singleton (2011) and Díaz, Groba, Lafuente, and Serrano (2013). There are two steps involved in obtaining the DRP. We first calculate the “pseudo- CDS” spread, denoted CDSP using expectations under the P-measure instead of the Q-measure to evaluate the model’s spread. Then, the DRP is obtained from the difference between the market CDS spread and pseudo-CDS spread. The results show that, on the average, the DRP accounts for 42% of the CDS spreads observed in the market. We also find that the DRP varies over time as the economy state changes, and particularly, it soars during the recent financial crisis. To explain our empirical finding that the DRP accounts for a substantial portion of the CDS spread and varies over time, we further investigate what determines the DRP and what drives it to change. To this end, we analyze the principal components of the cross-section of the DRPs. Our investigation shows that the first principal component explains about 97% or more of DRP variation, which implies that Korean companies’ DRPs are associated with investors’ appetites for the market-wide risk. To find what drives the first principal component, we regress the first principal component on a couple of domestic and global financial variables, which serve as proxies for the market risk premium. Specifically, the Volatility Index (VIX) is used as a proxy for a global variable of risk premium, and equity market risk premium, term premium, credit premium, and sovereign distress risk premium are examined as proxies for domestic risk premiums. The result shows that the VIX is statistically significant and has a striking power to explain the time-variation of the first principal component of corporate DRP. Among the domestic variables, equity market risk premium, term premium, and credit premium are statistically significant. However, sovereign distress risk premium (DRP implied in the Korean sovereign CDS spread) subsumes the explanatory power of the other domestic variables when added to the multiple regression. This finding indicates that sovereign DRP is the most important determinant of the co-movement of corporate distress risk premiums among the domestic variables. To control the endogeneity problem, the sovereign distress risk premium is orthogonalized to all other premiums, including VIX, the equity market risk premium, the term premium, and the credit premium. We then regress the first principal component of corporate DRPs on the orthogonalized sovereign DRP. This experiment shows that the orthogonalized sovereign DRP is statistically significant and explains the first principal component of corporate DRPs. This finding implies that sovereign DRP has additional information that is not contained in other risk premium proxies.
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