three essays in financial economics

Abstract

This dissertation presents three essays in financial economics. Section 1 examine the effect of IFRS financial statement disclosure, which become mandatory for large Korean listed companies from 2011. We also analyze whether the earnings differential under K-GAAP and IFRS (the old and new accounting conventions, respectively) has any meaningful relationship with the post-IFRS stock returns in order to determine if investors recognize the net profit change as a result of accounting standard change as unexpected returns. Additionally, we test the efficient market hypothesis with our dataset. Using the net income and industry data of 85 manufacturing companies and 10 financial companies that issue both IFRS and K-GAAP financial statements, we investigate factors to determine the earnings differential under the two standards and stock returns around announcement date. We then verify the relationship between CAR and the earnings differential using t-test. The results show that net income under IFRS increases compared to that under K-GAAP for the same period. Some evidence of value relevance is found in IFRS adjustments on earnings but not with IFRS adjustments in shareholders’ equity in the long-term view. These results suggest that great deal of IFRS reconciliations are anticipated by investors and firm value converges into fundamental factors. Section2 is a comparative analysis on the key driver of bank stock returns Our findings suggest that strong top-line growth is more important than profitability as a stock return driver for banks. This study analyzes stock price performances during the past decade and the key driver behind the stock price movements of 228 banks globally. We draw conclusions on the key trends in the banking as well as what investors have traditionally paid for and how it has been changed. We also draw conclusions on the implications of data for GEM (Global Emerging Market) and DM (Developed Market) banks. To interpret the data we have collected, we group each of the banks into their respective countries and regions and then classify them as either GEM or DM. While ROE (Return on Equity) was perceived as the key driver of bank stock prices, our analysis suggests that despite similar ROE levels from 2002 to 2006, GEM banks have outperformed DM banks almost every year. We attribute such performance mostly to the top-line growth and to a lesser extent, to the relative credit cost improvement. These findings are also supported by the regression analysis using panel data of 228 banks for the period of 2002-2011. Section3 examines the bid/ask spread and its components in the KOSPI200 options market under the framework of the cross-market model, which utilizes the order flow information of both KOSPI200 futures and options markets. We also compare the results by the single-market model (MRR model) and by the cross-market model (Ryu’s (2011) extension). This comparison suggests that the cross-market approach can mitigate the underestimation of the permanent spread component of OTM options as well as the overestimation of the component of ITM options. These are often detected when we directly apply the single market model into the KOSPI200 options market where the ITM options are illiquid, whereas the OTM options are highly liquid. We also find that the effect of the order flow information of futures market on the options spread and its permanent spread component will vary depending on the option moneyness and the intraday time period. This implies that the order flow of futures market has more significant effects if the degree of informed trading is relatively high.