This study analyzes the effect of corporate social responsibility activities on the cost of equity in Korea. We find that firms with better corporate social responsibility (CSR) performance generally exhibit cheaper equity financing. Considering three dimensions of CSR separately, we find that a higher “socially responsible management” significantly reduces the cost of equity by 1.13%-1.37% per annum and “Corporate governance” activity also marginally affects the cost of equity, while “environmental management” has no impact. Our result is robust in controlling for systematic risk, size, leverage ratio, and the number of analysts. These results imply that enhancing socially responsible management and corporate governance can increase firm value in Korea, but environmental management is not relevant for firm values. Putting differently, investors tolerate a lower return from firms with more CSR activities, because they expect them to provide sustainable incomes. Future researches can extend our approach to examining the effect on the cost of debt and cost of capital.

This study examines the short- and long-run effects of corporate social responsibility (CSR) activities on the credit risk implied in credit derivative prices. Measuring the different term effects on credit risk by the slope of credit default swap (CDS) spreads with different maturities, we investigate how CSR activities affect credit risk differently in the short and long run. Fama-MacBeth regressions reveal that firms with higher CSR scores tend to have more gently decreasing CDS slopes because, on average, CSR activities reduce credit risk in the long run more than in the short run. An analysis of individual CSR categories shows that while community, diversity and employee relations lead to a lower CDS slope, human rights and product characteristics increase the CDS slope. This finding suggests that not all CSR activities affect short-term and long-term credit risks in the same direction. Therefore, even though CSR activities can reduce credit risk in the long-run, some CSR activities may increase the short-term credit risk and hence increase short-term borrowing costs.

This study investigates whether the profitability of various factor investments is sustainable after costs due to price impact, and estimates the capacity of strategies in the Korean stock market. With various initial amounts invested as of the end of December 2000, we analyze after-cost-returns on factor investing during the period from January 2000 to December 2017, and estimate the break-even fund size and maximal profit fund size. To this end, whenever rebalancing factor-investment portfolios based on trading rules, the number of shares of stocks to be bought and sold is computed and the price impact costs of the transactions are taken into account. This procedure computes the implicit cost of trading of factor investing to produce after-cost-returns for various initial amount invested. While the momentum and value factors perform well before price impact costs, the profitability factor performs better after price impact costs. More specifically, the break-even fund size is estimated to be 1.4 trillion Korean won (KRW), and the maximal profit generating fund size is estimated to be 750 billion KRW which could attain a monthly net profit of 1.9 billion KRW over the sample period.

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We suggest a methodology to decompose sovereign bond yields into four components (riskfree, default risk, risk premium, and non-default) using both sovereign credit default swaps and bond data. Applying the methodology to one of the largest emerging markets, Korea, we find that each fraction varies over time and across bonds. In addition, the default risk accounts for only a small fraction of sovereign yield spreads, and a substantial portion is attributable to risk premium and non-default components. In particular, the risk premium is substantially time-varying; moreover, it increases in order to account for a major portion of the heightened yield spread during a financial crisis, implying that global investors prefer to hold safer assets. Therefore, higher risk premiums per unit risk are required than before. Our findings provide evidence on both flight-to-quality and time-varying risk premium.

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This study examines the risks and profitability of low-volatility investing in the Korean Securities Dealers Automated Quotations (KOSDAQ) market during the 2001–2017 period. We chose the KOSDAQ market because noise trading is dominant and stocks are likely to be mispriced. We, therefore, expected that low-volatility investing could generate robust profits on the KOSDAQ market, unlike investing on the KOSPI market. Our empirical results support our prediction. Several risk metrics also indicated that this strategy can be implemented in practice. Furthermore, our findings suggest that the idiosyncratic volatility anomaly can be magnified by the mispricing effects of noise trading.