The structure and formation of business groups: Evidence from Korean chaebols

We study the evolution of Korean chaebols (business groups) using ownership data. Chaebols grow vertically (as pyramids) when the controlling family uses well-established group firms (“central firms”) to acquire firms with low pledgeable income and high acquisition premiums. Chaebols grow horizontally (through direct ownership) when the family acquires firms with high pledgeable income and low acquisition premiums. Central firms trade at a relative discount, due to shareholders’ anticipation of value-destroying acquisitions. Our evidence is consistent with the selection of firms into different positions in the chaebol and ascribes the underperformance of pyramidal firms to a selection effect rather than tunneling.     

The analysis and valuation of interest rate options

This paper provides a simple, alternative model for the valuation of European-style interest rate options. The assumption that drives the hedging argument in the model is that the forward prices of bonds follow an arbitrary two-state process. Later, this assumption is made more specific by postulating that the discount on a zero-coupon bond follows a multiplicative binomial process. In contrast to the Black-Scholes assumption applied to zero-coupon bonds, the limiting distribution of this process has the attractive features that the zero-bond price has a natural barrier at unity (thus precluding negative interest rates), and that the bond price is negatively skewed. The model is used to price interest rate options in general, and interest rate caps and floors in particular. The model is then generalized and applied to European-style options on bonds. A relationship is established between options on swaps and options on coupon bonds. The generalized model then provides a computationally simple formula, closely related to the Black-Scholes formula, for the valuation of European-style options on swaps.     

On Speculation, Index Futures Markets, and the Link Between Market Volatility and Investor Welfare

This paper develops a trading model that incorporates informed speculators as well as investors who possess incorrect expectations about asset values. It is shown that the introduction of an index futures market, by stimulating additional misinformed speculation, increases market liquidity and adversely affects price variability and efficiency in the underlying stock markets. An analysis of the welfare of uninformed hedgers suggests that the relationship between uninformed investor welfare and two key parameters that dominate policy discussions, market liquidity and price variability, is quite tenuous.     

CEO characteristics,firm performance,and corporate political contributions

We investigate if CEO characteristics determine the choice of Political Action Committee (PAC) contributions by firms and if such participation leads to better firm performance. Using a unique, hand‐collected database, we also focus on the identity of the politicians receiving PAC contributions to examine the impact of the value‐relevance of such contributions. Examining data on corporate contributions made to candidates seeking federal office during the 2002, 2004, and 2006 election cycles, we find that CEO dominance and interest alignment influence strategic choices of firms with regards to establishing PACs. Our analysis of value‐relevant contributions shows that firms prefer to donate to politicians representing the state of a firm's headquarters, validating the truth to the adage that all politics is local. However, these targeted political contributions do not have a discernible impact on firm performance.     

Pricing and hedging American options: a recursive investigation method

In this article we present a new method for pricing and hedgingAmerican options along with an efficient implementation procedure.The proposed method is efficient and accurate in computing bothoption values and various option hedge parameters. We demonstratethe computational accuracy and efficiency of this numericalprocedure in relation to other competing approaches. We alsosuggest how the method can be applied to the case of any Americanoption for which a closed-form solution exists for the correspondingEuropean options.     

Foreign Firms Issuing Equity on US Exchanges: An Empirical Investigation of IPOs and SEOs

We analyse a sample of foreign firms issuing equity in the USA to determine the factors that affect IPO and SEO pricing. The average SEO discount, defined as the percentage difference between the price in the local market on the offering date and the SEO offer price, is 2.07%, and is significantly lower for stocks that are ultimately listed on the NYSE/AMEX than for stocks that are listed on the Nasdaq. Foreign equity issues are underpriced; the traditional underpricing discount, which is defined as the percentage difference between the closing price on the first day of trading and the offer price, is 18.75% on average. Equity issuers from industry groups with the largest six–month pre–IPO return in the US market experience a higher level of underpricing. For the subsample of emerging market issues, we document that, in the after–market, the ADR price remains persistently above the dollar denominated price in the domestic market for up to 90 days following the date of the issue.     

Asymmetric Information and News Disclosure Rules

When the imminence of news announcements is not public knowledge, many traders will lack information on both the mean and variance of private information. Our analysis of such a setting in both single and multisecurity contexts implies that disclosure of impending information events by firms can bound variance uncertainty and thereby improve investor welfare by mitigating the market breakdown problem. We also find that the equilibrium pricing functions are nonlinear; specifically, convex for small trades and concave for larger ones. In addition, we predict that large transactions will be followed by large levels of volatility. Journal of Economic Literature Classification Numbers: 022, 026, 522.     

Dynamic Information Disclosure

We explore the optimal timing of voluntary disclosures when firms and outside investors have correlated but not identical signals. By delaying disclosure of their signal, firms encourage the acquisition of information by investors by reducing the latter's exposure to the long‐term risk of holding the asset. Immediate disclosure reduces rents from acquiring the correlated signal, and thus is sometimes suboptimal in a dynamic setting. We characterize conditions under which postponing disclosure is preferable, which allows us to develop predictions on the timing of voluntary information disclosures such as management guidance.