The Study on the Effect from Uncertainty of Financial Market on Profitability of Security Firms: Evidence from Korea

This study examines empirically the relationship between income sources of Korean security firms and uncertainty of financial market. Through analyzing panel data of Korean security firms from the 1st quarter of 2005 to the 4th quarter of 2012. The main findings are as follows. First, operating income representing an overall profitability of security firms is significantly affected from stock price and market rate among the financial market variables. Bullish market and falling market rate contribute to increasing operating income. Second, major earning source of operating income, fee revenue is susceptible to financial market change such as stock price, foreign exchange rate between Korean won and U. S. dollar, and the volatilities of stock, interest rate, and foreign exchange market. Third, brokerage revenue is more vulnerable to financial market change than underwriting revenue among fee revenue. Brokerage revenue tends to be affected from most financial market change, but underwriting revenue is not significantly influenced by uncertainty of financial market except for market rate change. Fourth, size and liquidity effects, firm characteristics affecting profitability of financial institutions, exist discriminately affects earning sources of security firms.