New Bounds on Real Option Values

Unyong Pyo 한국재무학회 2007 한국재무학회 학술대회 Vol.2007 No.04

This paper constructs narrow bounds around the value of real options embedded in capital budgeting decisions by applying the minimax deviations approach to real options in incomplete markets. While it is straightforward to obtain the unique value of a real option with HARA utility functions, the parameters of risk-aversion are often subject to misspecification and raise concerns for practical uses. Recognizing that investors allow deviation from parameter values related to a benchmark pricing kernel, we derive narrow bounds on a real option price. Comparison with the approaches in the literature clarifies advantages of the minimax bounds: simple, consistent, and efficient.

Resolving the Underinvestment and Asymmetric Information Problems with Target Debt Ratios

Unyong Pyo,Yong-Jae Shin,Howard E. Thompson 한국재무학회 2010 한국재무학회 학술대회 Vol.2010 No.05

We show how target debt ratios in book value terms applied to new investment can be used to improve alignment of investment incentives toward value maximization in firms with risky debt outstanding and asymmetric information. While wealth transfer from both agency conflicts can reduce the value of existing equity, new debt offsets the value loss to old shareholders. Since financing a part of investments with new debt set by book debt ratios offsets wealth transfer effects, firms will not pass up valuable investment opportunities and will make optimal investment decisions. Numerical examples show that both agency conflicts can be eliminated with new debt set by a target book debt ratio.

On Target Debt Ratios

Unyong Pyo,Yong Jae Shin,Howard E. Thompson 한국로고스경영학회 2009 한국로고스경영학회 학술발표대회논문집 Vol.2009 No.7월

We show how target debt ratios can improve the investment incentives in firms with risky debt outstanding and with asymmetric information. While profitable investments in a firm with risky debt and/or asymmetric information can reduce the value of existing equity, new debt offsets the value loss to old shareholders. Since financing a part of investments with new debt set by target debt ratios offsets wealth transfer effects, firms will not pass up valuable investment opportunities and will make the optimal investment decisions.

On Target Debt Ratios

Unyong Pyo,Yong Jae Shin,Howard E. Thompson 한국재무학회 2009 한국재무학회 학술대회 Vol.2009 No.05

We show how target debt ratios can improve the investment incentives in firms with risky debt outstanding and with asymmetric information. While profitable investments in a firm with risky debt and/or asymmetric information can reduce the value of existing equity, new debt offsets the value loss to old shareholders. Since financing a part of investments with new debt set by target debt ratios offsets wealth transfer effects, firms will not pass up valuable investment opportunities and will make the optimal investment decisions. For the effectiveness of target debt ratios, the new debt can be issued with shelf registration and can maintain the same priority as in the old debt.

Impacts of CEO Incentives and Power on Employee Wages

Qianqian Li(Qianqian Li),Yong Jae Shin(Yong Jae Shin),Unyong Pyo(Unyong Pyo) The International Academy of Global Business and T 2022 The International Academy of Global Business and T Vol.18 No.6

Purpose - This study investigates the impact of CEO incentive compensation and power on employee wages. While CEO compensation negatively affects employee wages, powerful CEOs may care for employees, and their compensation can have positive impacts on employee wages. Design/Methodology/Approach - Using data from US capital markets during 1992 - 2017, we employ pay-performance sensitivity to measure incentive compensation and CEO pay slices to proxy CEO power. We also examined the potential interaction effects between CEO compensation and CEO power. We conduct a Heckman two-step analysis to address potential sample bias and two-stage regression to address potential endogeneity. Findings - While incentive compensation negatively affects employee wages, CEO power positively affects employee wages. When examining the interaction effect between incentive compensation and CEO power, we note that the incentive effect is negative on employee wages only when the CEO is less powerful. However, when the CEO is more powerful, the incentive effect is positive on employee wages. Research Implications - When firms grant incentive compensation to CEOs for firm performance, they must also consider CEO power. Our results imply that CEO incentive compensation has a positive impact on employee wages when a CEO becomes more powerful. More incentive compensation to less-powerful CEOs could suppress employee wages and hurt firm performance in the long run.

Idiosyncratic Momentum Returns

Songchan Guo,Unyong Pyo 한국재무학회 2019 한국재무학회 학술대회 Vol.2019 No.05

We study whether the idiosyncratic momentum strategy can generate excess returns following the emergence of traded options. We find that idiosyncratic momentum profits show attenuation since options started trading in 1996. Our results show that momentum returns for stocks with options in idiosyncratic momentum are positive and significant for three, six, and twelve months following the formation date, while those for stocks with options in traditional momentum are insignificant or even turn to negative. We also find strong evidence that the enhanced information efficiency led by allowing short selling has more impacts on traditional momentum returns than on idiosyncratic momentum returns. Overall, our results show that the idiosyncratic momentum strategy demonstrate an even bigger challenge to the conventional asset pricing literature.

CEO Compensation and Employee Wages

Rachel Graefe-Anderson,Unyong Pyo,Baoqi Zhu 한국재무학회 2018 한국재무학회 학술대회 Vol.2018 No.05

This study examines the impact of CEO equity-based compensation (EBC) on employee wages. Using pay-performance sensitivities (PPS) as a proxy for EBC and labor expenses as a proxy for employee wages, we conduct multivariate analysis (OLS models) and find that CEOs with higher EBC tend to pay their employees lower wages. We also examine the impact of EBC on average employee wages in different industries and find that such an impact is more evident in non-technology firms than in technology firms. Finally, we find that CEOs with higher PPS are more likely to depress employee wages when the business cycle shows a downturn. While the literature on CEO compensation suggests that EBC can mitigate agency conflicts between managers and shareholders, we suggest that high levels of EBC can create another aspect of the agency conflicts, contributing to income inequality even within corporations.

Liquidity Hedging with Financial Derivatives

Yong Jae Shin,Unyong Pyo 한국산업경제학회 2013 한국산업경제학회 정기학술발표대회 논문집 Vol.- No.춘계

Impacts of Financing Constraints on R&D

Yong Jae Shin(신용재),Unyong Pyo 대한경영학회 2016 대한경영학회 학술발표대회 발표논문집 Vol.2016 No.1

This article studies a large sample of South Korean firms during the period 2001-2014 and finds evidence of binding financing constraints to R&D investments by controlling for (i) potential importance of smoothing R&D with cash holdings and trade credits (ii) firm’s access to external equity and debt finance. This study recognizes an approach to assess financing constraints when firms extensively depend on external finance and endogenously maintain cushions of liquidity to keep R&D investments smooth. While we find evidence that internal cash flow is positively related to R&D investments, it appears that Korean firms are hesitant in keeping R&D investment smooth for transitory finance shocks. For external financing, we show that R&D investments are affected by debt financing, but not by equity financing in Korean firms. In the absence of equity issues on R&D activities, policymakers might consider stock market to take active roles in funding R&D activities as R&D investment demand outstrips internal financing.

On the Relations between R&D Investments and Financing Constraints in South Korea

Yongjae Shin(신용재),Unyong Pyo(표운용) 대한경영학회 2016 大韓經營學會誌 Vol.29 No.7