Stockpiling of liquid assets in cash decreases the possibility of a firm`s falling into financial distress and becoming technically insolvent. Such stockpiling provides incentives for firms to increase their leverage because cash holdings decrease potential financial distress costs and increase target debt-equity ratios. This paper examines whether firms` excessive cash holdings enhance an explanatory power of the marginal tax rate for the change in leverage. The results show that high-taxed firms with excess cash are more likely to increase their leverage. The increase in leverage is not to discipline the entrenched managers` discretionary use of free cash, and the excess cash is not simply for planned future investments either. We also find that the results still hold even when the financial crisis periods are excluded and that the debt financing behavior changes with the level of statutory tax rate. These findings provide evidence that firms with sufficient cash are more likely to take advantage of interest tax shields.

We examine the valuation effects of diversification activities for Korean firms by diversification type and the occasion of the Korean financial crisis. Employing a unique dataset of 2,894 firm-years for the entire manufacturing industries, we find that diversification by Korean firms on average decreases firm value but its effect varies by the type of diversification. While unrelated diversification erodes firm value, related diversification is associated with a non-negative effect on firm value. These valuation effects are more pronounced before the crisis than after the crisis. Our results also show an important role of a firm`s affiliation to a large business group, known as chaebols, that related diversification by chaebol-affiliated firms comes with a significant value gain. We further find that the different valuation effects of unrelated and related diversification are closely related to a firm`s ownership concentration and financial leverage. Our results are robust to different samples and regression model specifications.

This paper formulates a theoretical model to explain why target shareholders under corporate control contests allow their managers to play the role of a gatekeeper despite the conflicting incentive of the managers to resist takeover attempts that might increase firm value. The paper claims that sometimes the existence of a manager with a conflicting goal can contribute to enhancing the welfare of his shareholders under a corporate control contest where bidders have the choice of takeover methods. We set up a game-theoretical model and derive a separating equilibrium where bidders with higher synergy prefer a tender offer to a merger, and the bidders are forced to pay higher takeover premium in a hostile tender offer due to the existence of informed target managers who can make counteroffers under a merger deal.

In this paper, we examine optimal investment strategies of informed traders in an equity market, where well informed and not so well informed traders as well as noise traders coexist. Naturally, less informed traders follow more informed counterparts because of informational advantage. On the other hand, more informed investors can take advantage of less informed investors` trust by manipulating prices. Often, by inflating or deflating the equity prices, more informed traders make greater profits than less informed traders do. Over time, less informed traders become aware of the others` strategy, thereby a long-term equilibrium is to be attained, in which the more informed mixes his sincere and cheating strategy, and the less informed mixes his trust and distrust strategy. This model can be especially useful in understanding emerging markets, where foreign investors, local institutions, and local individuals are often characterized as more informed, less informed, and noise traders, respectively.

This study investigates how observable prior information affects individual analysts` earnings forecast revisions. Following Stickel (1990), it first examines how new information observed by Korean analysts and uncertainty in the analysts` current forecast affect the analysts` forecast revision. Then, this study extends the prediction model by examining how characteristics of new information (positive vs. negative change in consensus forecast) and the characteristics of the analysts` current forecast (higher vs. lower than the mean forecast) affect their forecast revision. The empirical results show that the individual analyst revision, the change in consensus forecast, and the cumulative stock returns are positively related whereas the revision and the deviation of the analyst`s current forecast from the consensus forecast are negatively related. Results also show more sensitive reactions to consensus change when analysts observe a negative consensus change. In addition, analysts` reaction to a negative consensus change is greater when their current forecast is greater than the prior mean forecast. These results suggest that analysts learn from market expectation changes and incorporate new information into their new forecasts.