The impacts of financial internationalization on market value and risk: evidence from the Korean capital market

This paper examines the impacts of thirty-eight announcements released in the process of financial internationalization from May 1980 to December 1990 on the market value and risk of publicly-traded financial institutions in Korea. The different types of financial institutions in the sample showed insignificant responses in most cases. However, the return responses became more significant as the uncertainty regarding the final form and contents of the legislation was resolved over time. In addition, the return responses differed across different types of financial institutions. The effects of wealth redistribution found within the financial market are consistent with Stigler's wealth transfer hypothesis. It is important to note that there was an existence of market adjustment process and market disequilibrium as market participants correct their expectations. The decreases in systematic risk responses of banks and securities companies found after two comprehensive internationalization plans were announced in 1980 and 1988 are inconsistent with Peltzman's risk-buffering hypothesis. 1. Problem Identification The progress of financial internationalization in Korea has attracted keen attention from both the domestic and international markets. Until the 1980s, the Korean capital market was long closed to foreign investors due to the government's efforts to protect and foster the domestic financial market. The internationalization of the Korean capital market gradually began with the disclosure of the long-range and comprehensive internationalization plan on January 14, 198 1. The internationaliza tion plan was tailored in pursuit of corporate financing through the foreign capital market on the one hand and moving ahead with the open-door economic policy on the other. The initial plan was revised a few times thereafter to adjust to internal and external circumstances and the speed of financial internationalization has accelerated during the latter half of the 1980s. In the financial opening process, various deregulatory measures have been taken in the areas of foreign exchange transactions, capital account transactions, and financial services industries. On December 2, 1988 the Korean Ministry of Finance revised the final schedule for opening the domestic capital market, which was more tangible than the initial one. Finally, the Korean domestic stock market was opened to foreigners in January 1992. Theoretical disciplines and empirical research in the economics of regulation and capital market equilibrium can provide several competing hypotheses for examining the effects of regulatory changes. This study examines several important issues in the stock market reaction to the financial internationalization in Korea. First, it looks at the wealth effects of the internationalization of the Korean capital market on the stock returns of different types of financial institutions, including commercial banks, security companies, investment and finance companies and insurance companies. The common stock price performance of different financial institutions can be examined in terms of the regulatory and legislative changes and firm-specific characteristics. Along with the . 0-'7803-5729-9/99/$10.00