Prudent Supervision Index Of Korea Financial Companies And The Market Reaction

Many countries have made efforts consistently to improve their financial system and regulatory policies.Korea also has established The Financial Supervisory Service(FSS),an integrated supervisory authority,to reform financial supervisory system in 1999,which was one of measures taken to overcome economic crisis.However,the question about the efficiency of financial regulation was raised since the global financial crisis in 2008 caused by U.S.subprime mortgage crisis.Also,the need to change policies of regulation and supervision on the financial industry was increasingly required.This paper analyzes the correlation between financial soundness indicators and performances of financial companies and examines market responses to financial soundness indicators.Also,it also investigates the type of financial institutions,that is,banks,brokerage firms and insurance companies would influence the market responses.Through the investigation,it could lead to indicate the problems of financial soundness indicators and suggest several remedies.Specifically,the paper examines the stock market responses to the financial soundness indicators of banks,brokerage firms and insurance companies listed on Korea Stock Exchange(KSE)by quarter from 2010 to 2014.It analyzes the correlation between the financial soundness indicators of banks,brokerage firms and insurance companies and their cumulative abnormal returns(CAR)based on the hypothesis that the better financial soundness indicators,the better stock market responses.The main empirical result of the study is summarized as follows:(1)The capital adequacy of banks and insurance companies responds significantly on KSE.(2)The asset soundness indicators of banks and insurance companies respond significantly on KSE.(3)The profitability indicators of banks,insurance companies and brokerage firms respond significantly on KSE.(4)Banks' liquidity ratio shows significant response on KSE.(5)Banks,insurance companies and brokerage firms show different degree of the market responses on financial soundness indicators.First,the market responses on financial soundness indicators of banks and insurance companies is larger than that of brokerage firms.Second,the four financial soundness indicators for banks show significant CAR and three financial soundness indicators for insurance companies show significant CAR.However,in case of brokerage firms,only one financial soundness indicator shows significant CAR.