Death Spiral Issues in Emerging Market: A Control Related Perspective
39 Pages Posted: 5 Aug 2009 Last revised: 1 Oct 2009
Date Written: September 2009
This paper studies the motive of issuing floating-priced convertibles or warrants, known as death spirals, in a country where the private benefit of control is high. Using a total of 199 death spiral issuances by public firms listed in the Korea Stock Exchange during 1998-2006, we find a number of pieces of empirical evidence that are less consistent with the last-resort financing hypothesis, but rather consistent with the control enhancing or control transferring hypothesis. First, operating performance of death spiral issuers are not necessarily poor at the time of the issue, nor do they deteriorate over time following the issue. Second, we do not observe subsequent changes in the controlling shareholder in more than 60% of the issuers and these firms exhibit superior operating performance at the time of the issue compared to other death spiral or non-death spiral issuers. Third, this same set of firms do not experience a decrease in proportional ownership by the controlling party, while family members other than the controlling shareholder experience the most pronounced increases in the number of shares held. Finally, in approximately half of these firms, at least one member of the controlling party holds hybrid securities that can be later converted into the firm’s voting shares.
Keywords: Death spirals, Convertibles, Warrants, Control enhancing mechanisms, Korea
JEL Classification: G32, G34
Suggested Citation: Suggested Citation