Essays on equity market investor behavior and dividend policy

Abstract

This paper provides three essays on the investor behavior within the Korean equity market and a specific dividend payout policy used by Korean companies. The first chapter uses an event where the transparency increase in the preopening session on price discovery occurred in the Korea Exchange (KRX) market on October 6, 2003. Such actual policy change is rare in the real world and provides a rich research ground to test investor behavior during and even after the preopening period. The findings reveal that investors participated more actively after the transparency increase, but that their participation did not accelerate the price discovery, because they placed fake orders more frequently until the last five minutes of the preopening session. The second chapter investigates the characteristics and reasons why Korean firms use a unique cash dividend payment scheme called differentiated dividends. Differentiated dividend is a method used when managers pay higher cash dividends per share to small shareholders compared to large shareholders. We report that, firms listed in the KSE market show strong probability to initiate or terminate differentiated dividends for cash insufficiency reasons. In the final chapter we turn the focus on trading activity of institutions or individuals to the consecutive change in trading activity of different investment groups. We find that foreign investors lead herding activity which affects individual investors trading activity. However, institutional investors are not influenced by momentum trading and show strong persistence of herding among them. We conclude that foreign investors’ trading has induced momentum profits which are observed after the Asian financial crisis.