Jongsub Lee - Research

Research Interests

• Corporate Finance

• Derivatives

• Credit Risk

Working Papers

• Corporate Finance in Family Business Groups, Job Market Paper, November 2009
  2009 Best Dissertation Proposal Award in International Finance, FMA
  Abstract
  I present a theory of the optimal capital structure and dividend policy for expanding family business groups vertically or horizontally. When private control benefits are substantial, takeover threats impose a constraint on external equity financing. Debt can overcome this restriction but introduces the possibility of bankruptcy where control benefits are also lost. Relative to a horizontal structure, a vertical pyramid enhances internal capital financing, but the family has to share more of the profit from the new firm with its existing shareholders, implying that a pyramid is more likely when external financing constraints are more severe, or the new firm is less profitable but capital intensive. In equilibrium, subsidiaries are less leveraged than horizontal entities directly controlled by the family because the parent firm supports subsidiaries with greater amounts of internal capital. Within a pyramid, the leverage ratio should decrease from top to bottom because the parent firm’s collateralized debt capacity is larger. At the same time, dividend payout should increase from top to bottom since this is how the family transfers wealth out of the subsidiaries without selling control shares to ensure its control over the parent firm against default. Therefore, the theory predicts a decreasing leverage ratio from top to bottom of the pyramid, supported by a dividend policy where the parent firm pays out less to maximize group internal capital, while subsidiaries pay out more to service the parent firm’s debt. I confirm these predictions using a unique data set on Korean business groups. Together, the empirical results and theory suggest that the structure of a business group is strategically designed to maximize control.
  

• Good Delisting and Bad Delisting: Implication of Selection Biases for Value and Size Effects, October 2007
  New Version of the Paper Draft Will Be Posted Soon!
  Invited to 2008 London Business School, The 8th Trans-Atlantic Doctoral Conference, London, U.K.
  Abstract
  CRSP monthly returns for delisted stocks are missing for the month when they become delisted. Small firms are more likely to be delisted than big firms. I find that small value firms and small growth firms show different delisting properties: small value firms are most likely delisted due to poor performance(Bad Delisting) and least likely to be acquired(Good Delisting), whereas aquisition is favored for small growth. Furthermore, delisted stock returns covary with the two delisting events ex-postly: firms being acquired earn positive realized returns, whereas firms delisted due to poor performance exhibit negative realized returns. Therefore, when we test the unconditional CAPM with the incomplete CRSP monthly return data, both small value firms and small growth firms should have abnormal positive returns due to their proximity to Bad Delisting event(Shumway 1996). But small growth firms show lower abnormal returns than small value firms because small growth firms are more likely to be saved by acquisition upon delisting(Value effect due to Good Delisting). Introducing a double-selection Heckit model, I empirically document these findings for CRSP monthly stock returns in post-1963 period.