Narrow Results

This study investigates the empirical relationship between the use of derivatives by Korean banks and risk. In doing so, we employ two alternative measures of proxy for firm risk: systematic risk and ex ante earnings volatility.

Contrary to the general concerns about the risk-increasing role of the use of derivative products, our results indicate that banks' derivatives are, on average, associated with two measures of risk in negative ways. The evidence is consistent with the conjectures that derivative use reduces noise related to exogenous factors and hence decreases firm risk. This suggests that equity market participants, on average, perceive derivative activities by banks as a sign of banks' efforts to reduce risk.

We examine the relation between the presence of an independent director who is a blockholder (IDB) and corporate policies, risk-taking, and market valuation. After accounting for endogeneity, firms with an IDB have significantly (1) lower levels of cash holdings, payout and research and development (R&D) expenditures, (2) higher levels of capital expenditures, and (3) lower risk. The market appears to value IDB presence and the associated decrease in dividend yield. About 75% of the IDBs in our sample are individual investors, who drive most of our results. Our findings suggest that IDB presence plays a valuable role in shaping some corporate policies and allocating corporate resources.