Investment and Cash Flows in Internal Capital Markets: Evidence from Korean Business Groups

Yoon K. Choi, University of Central Florida, USA
Seung Hun Han, Korea Advanced Institute of Science and Technology, Korea
Sangwon Lee, University of Houston, USA

We examine the extent of expropriation by controlling owners of business groups. Specifically, we investigate the investment behavior of Korean business groups’ (chaebols’) member firms with respect to cash flows of their own operations as well as other affiliated firms. We also explore the role of corporate governance in curtailing expropriation by investigating the impact of audit committees on investment/cash flow sensitivities. We find that high cash flow rights are associated with reducing overinvestment, while the investment sensitivity of chaebol firms to their own cash flows remains unaffected. By contrast, investments are significantly sensitive to cash flows of other affiliated firms in the business group with high cash flow rights. Furthermore, investment decisions appear to be more efficient among firms with audit committees than among those without. The results suggest that internal capital markets of chaebol firms are active and at least partly efficient in the post-Asian financial crisis period.

Keywords: investment; cash-flows; corporate governance; business groups

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The Risk-Asymmetry Index as a New Measure of Risk

Elyas Elyasiani, Temple University, USA
Luca Gambarelli, University of Modena and Reggio Emilia, Italy
Silvia Muzzioli, University of Modena and Reggio Emilia, Italy

The aim of this paper is to propose a simple and unique measure of risk that subsumes the conflicting information contained in volatility and skewness indices and overcomes the limitations of these indices in accurately measuring future fear or greed in the market. To this end, the concept of upside and downside corridor implied volatility, which accounts for the asymmetry in the risk-neutral distribution, is exploited. The risk-asymmetry index is intended to capture the investors’ pricing asymmetry towards upside gains and downside losses. The results show that the proposed risk-asymmetry index can play a crucial role in predicting future returns, at various forecast horizons, since it subsumes the information embedded in both the volatility and skewness indices. Furthermore, the risk-asymmetry index is the only index that, at very high values, possesses the ability to clearly highlight a risky situation for the aggregate stock market.

Keywords: risk-asymmetry; corridor implied volatility; risk-neutral moments; risk measures; return predictability

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