In this paper the interest rate sensitivity of common stock returns of financial firms is re‐examined. Considered here are (1) current, anticipated, and unanticipated changes in interest rates; (2) depository and nondepository firms; and (3) three different‐maturity interest rate indices. Results lend strong support for a negative effect of both current and unanticipated interest rate changes. Although some exceptions are observed, stock returns of most subsectors of both financial and nonfinancial firms are not sensitive to anticipated interest rate changes. The findings of this study are robust to the choice of a particular model of interest rate expectations.

We find that Hofstede's cultural dimensions-uncertainty avoidance, masculinity, and long-term orientation-remain significant in the determination of firms' dividend policies, even after controlling for corporate governance. We also show that this association varies with the strength of corporate governance, measured by the degree of investor protection. Hence, national culture and investor protection independently affect firms' dividend payouts but also interact with each other, such that strong investor protection induces higher dividend payouts in high uncertainty avoiding and/or highly masculine cultures. Our results provide strong evidence that cultural differences matter and offer additional power in explaining variations in dividend policies.

We examine the effect of the introduction of index futures trading in the Korean markets on spot price volatility and market efficiency of the underlying KOSPI 200 stocks, relative to the carefully matched non-KOSPI 200 stocks. Employing both an event study approach and a matching-sample approach for the market data during the period of January 1990-December 1998, we find that the introduction of KOSPI 200 index futures trading is associated with greater market efficiency but, at the same time, greater spot price volatility in the underlying stock market. We also find that KOSPI 200 stocks experience lower spot price volatility and higher trading efficiency than non-KOSPI 200 stocks after the introduction of futures trading. The trading efficiency gap between the two groups of stocks, however, declines over time and vanishes following the addition of options trading. Overall, our results suggest that while futures trading in Korea increases spot price volatility and market efficiency, there exists volatility spillover to stocks against which futures are not traded. We provide several factors unique in the Korean markets including circuit breakers, sidercar system, restrictions on foreign ownership, and inactive program trading as potential factors to explain some of our puzzling evidence. We further consider the potential effect of changes in daily price limits utilized by the Korea Stock Exchange during the testing period on our empirical findings.

This paper examines the effect of R&D investments on the market value of firms in the U.S., Germany, and Japan. Specially, this paper investigates the empirical validity of the widely‐held economic views that suggest that the stock‐market oriented U.S. financial system leads to more corporate myopia and hence to less longer‐term investments such as R&D than the bank‐oriented German and Japanese firms. Findings include that U.S. firms invest in R&D as much as their counterparts in Japan and Germany; the market places a significant and positive value on R&D investments by U.S. firms, though lower than German and Japanese firms; and there are notable differences among the three nations with respect to several other variables. The overall evidence lends little support to the corporate myopia view on U.S. firms.

Employing firm‐level data for Korean firms, we find that firms with more export, more foreign currency debt, and higher exchange rate exposures are likely to use more currency derivatives for hedging. 2SLS regressions reveal that as more currency derivatives use does not lead to lower firm risk, such transactions, especially sell transactions, bring in higher firm values. Further, currency derivatives use by firms with high exposures is associated with lower firm risk but lower firm values as well. These findings suggest that currency derivatives work in hedging risk and protecting values for firms with low and manageable exposures.

We examine whether firms’ multinationality leads to better performance and what the role of R&D investment is in the multinationality performance linkage. Unlike the previous studies, we employ both accounting‐ and market‐based measures of firm performance for a large sample of U.S. manufacturing firms. Our results show that the empirical relation between multinationality and performance is not monotonic but varies with the phase of a firm’s multinationality, starting with a negative relation initially, followed by a positive one, and then again a negative one. This horizontal S‐shaped curvilinear relation of multinationality is more pronounced for the market‐based performance measure and is supportive of the three‐stage theory of internationalization. We also find that a firm’s multinationality is related to greater firm performance when the firm possesses R&D investment, and that the effect of R&D increases with the extent of a firm’s multinationality. These results lend strong support for the Internalization theory and the resource‐based view of firms’ international expansion. Our results are robust to different model specifications with an alternative measure of multinationality.

We examine the trading behavior and performance of foreigners, local institutions, and individual investors in the Korean stock market. The key research issue is whether the commonly-documented information disadvantage of foreign investors translates into their underperformance relative to local institutional and individual investors. Our results show the opposite, that the stocks foreigners buy significantly outperform the stocks they sell in terms of both stock returns and operating profitability, leading to the significant outperformance of foreigners' trading strategies over those of local investors. Our results provide strong evidence that the superior performance of foreigners is attributed to their ability to discern between company stocks with good versus bad, at least short-term, prospects. Our findings on the trading behavior of investors in the Korean market are, in general, consistent with those for other markets documented in the published literature. Foreigners behave like short-term momentum traders pursuing a growth strategy. Local institutions also trade like *Acknowledgments: The authors wish to thank Larry Bajor, Joon Chae, Lucy Chernyk, Sung Wook Joh, Bong Chan Kho, Daniel P. Klein, Frank Laatsch, Christopher Ting, session participants at the Financial Management Association meetings and the Annual International Conference on Asia-Pacific Financial Markets, seminar participants at Seoul National University, an anonymous reviewer and the Special Issue Editor (S. Ghon Rhee) of the Journal for many valuable comments, and Hana Bae for extensive editorial help. Bae and Min acknowledge the financial support from the College of Business Administration Summer Research Grant program at Bowling Green State University and from Seowon University, respectively. **Corresponding author: Department of Finance, College of Business Administration, Bowling Green State University, Bowling Green, OH 43403, USA. Tel: 1-419-372-8714, Fax: 1-419-372-2527, email: bae@bgsu.edu. Asia-Pacific Journal of Financial Studies (2011) 40, 199-239 doi:10.1111/j.2041-6156.2011 Ó 2011 Korean Securities Association 199 momentum traders but tend to buy value stocks. In contrast, individual investors trade like contrarians who buy past losers and sell past winners. Our findings show that foreigners prefer large-cap stocks with high dividends. In sharp contrast, individual investors have a strong preference for small-cap, high-leverage, low dividend paying stocks, whereas local institutions tend to buy small-cap, low leveraged stocks.

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