Earticle

This paper explorers the contributing factors to the Terra (UST)-Luna crash in May 2022. We argue that the crash was primarily fueled by the unsustainable interest rates offered by the Anchor Protocol. Initially, Terra was designed to facilitate fee-free payments and ensure stability through a diversified demand base from payment services. However, the launch of the Anchor Protocol in 2021, with its 19.45% interest rate, shifted UST's focus towards speculative demand. This change led to an unsustainable increase in UST's supply, ultimately triggering a run from Terra. We discuss flaws in the governance mechanism for setting Anchor Protocol's interest rates. The exorbitant yield offered by the Anchor Protocol significantly contributed to undermining Terra's long-term stability. The speculative demand incited by the Anchor Protocol's high interest rates was likely a major factor in the Terra collapse in May 2022.

1987년부터 2023년까지 장기간의 한국 주식시장 자료를 분석한 결과, 한국에서는 미국과 달리 장부-시장가치 효과가 여전히 강하게 관찰된다. 그러나 장부-시장가치 비율을 포함한 여러 가치측도들의 가치 프리미엄에 대한 예측 성과를 분석한 결과는 장부-시장가치 효과가 진정한 가치 프리미엄을 나타내는 것이 아닐 가능성을 시사한 다. 장부가치가 크게 이익잉여금과 납입자본의 두 요소로 구성된다는 점을 고려하여 이익잉여금-시장가치와 납입자본-시장가치의 수익률 예측력을 분석한 결과, 이익잉 여금-시장가치비율의 예측력은 장부-시장가치 효과보다 뚜렷하나 납입자본-시장가 치비율은 가치 프리미엄을 전혀 예측할 수 없다. 이는 장부-시장가치비율이 가치 프리미엄에 대한 유용한 정보 뿐 아니라 무관한 정보까지도 포함하고 있음을 의미하는 것으로, 실제로 가치 프리미엄과 무관한 납입자본-시장가치 요인의 영향을 크게 받는 시기에 장부-시장가치 효과는 약화된다. 여러 가치측도를 기준으로 한 요인 포트폴리 오들의 스패닝 회귀분석 결과 HML 요인의 정보를 모두 포괄하며 추가적인 정보를 가지는 것은 이익잉여금-시장가치 요인이며, 그 다음으로는 배당-주가비율 요인이 HML 요인보다 포괄적이다. 모든 결과들은 이익잉여금-시장가치비율이 진정한 가치 프리미엄을 예측할 수 있는 가장 유용한 가치측도임을 시사한다.

Due to the influential works of Fama and French (1992, 1993), the value premium often refers to the book-to-market effect although there are alternative valuation measures. Recent evidence indicates that the book-to-market effect has weakened over time or even disappeared in the U.S. stock market. The literature suggests that, even in the Korean stock market, the value premium measured by an individual valuation ratio, including book-to-market, may significantly fluctuate over time, and a value factor constructed based solely on the book-to-market ratio may not capture the true value premium. This study aims to verify the predictability of value premiums based on various valuation measures, not just the book-to-market equity ratio, and to identify which value predictor is consistently useful in the Korean stock market over a long period from 1987 to 2023. We further attempt to investigate why the most useful valuation measure has a better predictive performance than others. To this end, we consider six valuation measures, including the book-to-market ratio, retained earnings-to-market ratio, contributed capital-to-market ratio, earnings-toprice ratio, cash flow-to-price ratio, and dividend-to-price ratio. The main findings are summarized as follows. First, except the contributed capital-to-market ratio, all alternative value measures can significantly predict the cross-section of stock returns when book-to-market is controlled for. The most significant is retained earnings-to-market, followed by dividend-to-price, and these two measures predict value premiums more strongly than the book-to-market ratio. The results are consistent with Ball et al. (2020) in that retained earnings-to-market is a strong predictor of the value premium whereas contributed capital-to-market is not, but controlling for the retained earnings-to-market ratio does not eliminate the predictive power of book-to-market in Korea. Second, we construct value factors based on each of the six valuation measures to compare their historical performance and find that the HML factor, which represents the book-to-market effect, has a Sharpe ratio of 0.35 in the period prior to July 2005 and 0.83 in the period after July 2005, indicating a stronger recent performance unlike in the U.S. market. However, when compared to alternative value factors based on useful valuation measures, the HML factor performs worst before July 2005 and best after July 2005, which implies that the book-to-market effect substantially varies over time, as in the U.S. market. On the other hand, the retained earnings-to-market factor has the highest Sharpe ratio of 0.64 throughout the sample period and almost equal Sharpe ratios during the periods before and after July 2005. In addition, the retained earnings-to-market factor has higher correlations with the earnings-to-price, cash flow-to-price, and dividend-to-price factors than the HML factor. Therefore, retained earnings-tomarket is the strongest and most reliable predictor of the true value premium in any period. The HML factor incorporates not only the useful information contained in retained earnings-to-market but also the information in contributed capital-to-market, which has little to do with the value premium, and as a result, it performs worse in periods when it is highly affected by contributed capital-to-market. In this sense, the HML factor may be a relatively unstable indicator of the true value premium. Third, in spanning regressions, the retained earnings-to-market factor subsumes all other value factors, including HML, and has additional information that the other value factors do not have. The next most valuable value factor is the one based on the dividend-to-price ratio. The remaining value factors and the HML factor do not seem to capture all of the information from each other and their priority is not clear. As a result, the value factor that is most useful as an asset pricing factor seems to be the retained earnings-to-market factor. Finally, considering that retained earnings represent the difference between accumulated earnings and accumulated dividends over the firm’s history, we investigate whether accumulated earnings or accumulated dividends over recent years are more responsible for predicting the cross-section of expected returns and find that accumulated dividends, rather than accumulated earnings, primarily drive the predictive power of retained earnings-to-market in Korea. Moreover, we find that retained earnings-to-market can strongly predict the growth in earnings over two to three years. In contrast, the book-to-market, cash flow-to-price, dividend-toprice ratios do not predict earnings growth. Therefore, the outperformance of retained earnings-to-market as a predictor of the value premium may be related to useful information about future earnings growth. Although we show that the book-to-market effect has recently become stronger in Korea, unlike in the U.S., our findings are consistent with recent evidence in the U.S. market in that the book-to-market effect may not always represent a true value premium. Our findings consistently show that the retained earnings-to-market ratio is the best predictor of the value premium among well-known and easily observable valuation measures. Moreover, our results of spanning tests suggest that it may be desired to construct a value factor based on retained earnings-to-market rather than book-to-market in asset pricing models.

We investigate the factors influencing investors' decision-making in the Korean mutual fund market. Our findings indicate that investors prioritize simple signals when allocating capital to mutual funds, such as excess returns on benchmarks designated by fund rating companies or market indices like KOSPI and KOSPI200. Conversely, investors are less inclined to use sophisticated asset pricing models, including the CAPM (Capital Asset Pricing Model), Fama and French (1993) Three-factor model, and Carhart (1997) Four-factor model. Notably, institutional investors are more likely than retail investors to utilize these asset pricing models when selecting mutual funds. Our results remain robust even when accounting for observations following the Global Financial Crisis (GFC), extreme returns, and changes in fund ratings provided by rating agencies. Furthermore, we demonstrate that the weighting of time-series fund flow-performance sensitivity does not affect our conclusions. Our research suggests that in Korea's mutual fund market, investors tend to rely on straightforward indicators rather than the complex pricing models proposed by earlier studies. Importantly, our results suggest that this preference for simple indicators among retail investors is not unique to any specific country. We conclude that retail investors generally lack the level of financial literacy required to effectively use risk-adjusted performance measures.

과신 경영자는 자신의 능력에 대한 과도한 판단으로 인해 더 위험한 프로젝트를 수행하고 따라서 기업 가치에 부정적인 영향을 준다는 연구와 적극적인 혁신 활동을 통해서 기업 가치를 높인다는 실증 결과가 서로 상충되는 과신 경영자 퍼즐(overconfident manager puzzle)이 존재한다. 본 연구는 선행연구에서 사용한 과신 변수가 실제로는 미래에 대한 낙관적인 전망(optimistic perspective)을 측정하고 있음에 착안하여, 비현실적이거 나 근거가 희박한 낙관성을 과신(unrealistic optimism)으로, 현실에 근거한 긍정적인 전망은 낙관성(realistic optimism)으로 구분한다. 2009년부터 2020년 동안 8,382개 국내 표본을 대상으로 한 본 연구의 주요 결과는 다음과 같다. 경영자가 낙관적인 전망을 가질수록 주가 수익률의 변동성으로 측정한 투자 위험성이 줄어드는 음(-)의 관계를 나타냈는데, 이는 과신 경영자가 위험한 투자를 실행한다는 일부 선행 연구의 예측과 다른 결과이다. 또한 국내에서 낙관적 전망의 경영자는 더 많은 R&D 투자를 하고, 더 많은 특허를 만들고, 더 많은 현금 보유량을 가지는 것으로 나타났다. 그리고 혁신 활동의 결과로 인해 낙관적인 경영자의 기업일수록 Tobin’s Q로 측정한 기업 가치가 증가한다는 사실을 발견했다. 본 연구의 결과는 미래에 대해 낙관적 전망을 가진 경영자가 과도한 위험 투자보다는 혁신을 강화하는 효율적인 투자 활동을 통해 기업 가치를 높이고 있음을 의미하며, 미래에 대해 낙관적 전망을 가진 경영자가 비이성적 심리적 편향(bias) 보다는 현실에 근거한 낙관성(realistic optimism)을 가지고 있음을 시사한다.

Research suggests that overconfident managers often harm firm value by taking excessive risks due to overly optimistic future outlooks or inflated self-assessments (Griffin and Tversky, 1992; Malmendier and Tate, 2008). Overconfident CEOs are reported to overestimate the expected returns from uncertain ventures. However, Hirshleifer, Low, and Teoh (2012) present evidence that overconfident CEOs, who tend to be more enthusiastic about challenging and risky projects, invest more in innovation and often succeed, introducing the "overconfident manager puzzle" where such managers enhance rather than damage firm value. This study aims to test these conflicting findings in the context of Korean firms. It explores the hypothesis that optimistic managers—unlike overconfidence, which is traditionally viewed as harming firm value through overinvestment—might instead be innovators who enhance firm value. The study utilizes a novel methodology involving machine learning to measure managerial overconfidence. Unlike U.S. studies that often use stock options as indicators, this research leverages text analysis of managerial opinions disclosed in business reports, using the BERT machine learning model to quantify optimism. The ambiguity in measuring overconfidence in previous studies is another consideration. Psychologically, overconfidence is seen as an irrational bias, but empirical variables might capture a manager’s rational optimism about the future. If a manager’s outlook is rational, overconfidence could lead to positive outcomes, unlike the negative connotations typically associated with it. Many studies interchange overconfidence with optimism, where the former implies irrational excessive confidence and the latter signifies a positive future outlook. Generally, overconfident CEOs are believed to make poor decisions by overestimating future performance and underestimating risks, leading to value-destroying mergers and acquisitions (Malmendier and Tate, 2005, 2008). Such CEOs are often reported to overpay in M&A deals, necessitating strict control through compensation and governance structures. Overconfident managers also tend to invest more than their less confident counterparts, potentially harming firm value through overinvestment (Moez and Amina, 2008; Chen, Ho, and Ho, 2014). Conversely, some researchers highlight the positive roles of overconfidence. It can enhance decision-making execution, encourage necessary risk-taking for shareholder benefit, and stimulate entrepreneurial activities (Russo and Schoemaker, 1992; Goel and Thaker, 2008; Bernardo and Welch, 2001). Hirshleifer et al. (2012) found that overconfidence negatively impacts acquisitions but positively influences innovation. They suggest that overconfident managers in firms with innovation opportunities can achieve significant success, unlike those in firms without such opportunities who might make detrimental acquisition decisions. The study’s empirical analysis yielded several key findings. First, contrary to expectations, there was a negative relationship between CEO Optimism and risk, as measured by stock return volatility, suggesting that optimistic CEOs do not prefer riskier projects unlike overconfident CEOs. However, this relationship turned positive when controlling for capital availability, indicating that optimistic CEOs choose risky projects when capital is accessible. This implies that the measure of optimism might reflect rational optimism rather than irrational bias. Second, optimistic CEOs were found to increase R&D investments and engage more in innovation activities, such as filing patents. Third, they tend to hold more cash to seize future investment opportunities. Last, optimistic CEOs were confirmed to enhance firm value, aligning with Hirshleifer et al. (2012), suggesting that they are rational optimists driving innovation rather than irrationally overconfident leaders. In conclusion, the study reaffirms that optimistic managers can be seen as rational optimists whose confidence drives innovation and firm value enhancement, challenging the traditional view of overconfidence as purely detrimental.