An examination of the market valuation effects of financial reform in Korea

This paper uses an event-study methodology to examine the wealth effects of Korea's recent move toward financial market liberalization. A government plan finalized in 1993 calls for further interest rate deregulation, greater autonomy for managers of financial institutions, and a blurring of the distinction between commercial banks, investment banks, and insurance companies. These changes will have complex and offsetting effects on the profitability of financial institutions, as they represent a combination of increased opportunity, which should enhance profitability, and increased competition, which should reduce profitability. The goal of this paper is to determine empirically the relative strength of these opposing forces. ; Three main results emerge from the analysis. First, commercial bank shareholders experienced positive and significant "abnormal returns," while shareholders of investment banks and insurance companies remained largely unaffected. This suggests that financial liberalization is expected to raise the profitability of commercial banks without adversely affecting the profitability of other financial institutions. Second, the systematic risks (i.e. "betas") of both commercial and investment banks declined following the announcement of the plan. Third, most of the gains to the commercial banking industry appear to be concentrated in the local banking market. That is, nation-wide banks were largely unaffected by the announced plan.