Death Spiral Issues in Emerging Market: A Control Related Perspective

39 Pages Posted: 5 Aug 2009 Last revised: 1 Oct 2009

See all articles by Woochan Kim

Woochan Kim

Korea University Business School; European Corporate Governance Institute (ECGI); Asian Institute of Corporate Governance (AICG)

Woojin Kim

Seoul National University - Business School

Hyungseok Kim

Korea Corporate Governance Service

Date Written: September 2009

Abstract

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

Kim, Woochan and Kim, Woojin and Kim, Hyungseok, Death Spiral Issues in Emerging Market: A Control Related Perspective (September 2009). KDI School of Pub Policy & Management Paper No. 09-05. Available at SSRN: https://ssrn.com/abstract=1444153 or http://dx.doi.org/10.2139/ssrn.1444153

Woochan Kim (Contact Author)

Korea University Business School ( email )

LG-POSCO Bldg #524
Anam-Dong, Seongbuk-Ku
Seoul, Seoul 136701
+822-3290-2816 (Phone)
+822-922-7220 (Fax)

HOME PAGE: http://biz.korea.ac.kr/professor/wckim

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Asian Institute of Corporate Governance (AICG) ( email )

1, 5-ga, Anam-dong
Sungbuk-gu
Seoul, 136-701
Korea, Republic of (South Korea)

Woojin Kim

Seoul National University - Business School ( email )

1 Gwanak-ro, Gwanak-gu
Seoul, 08826
Korea, Republic of (South Korea)
82-2-880-5831 (Phone)

HOME PAGE: http://cba.snu.ac.kr/en/faculty?mode=view&memberidx=60582&major=6

Hyungseok Kim

Korea Corporate Governance Service ( email )

76, Yeouinaru-ro, Yeongdeungpo-gu
Seoul, 150-977
Korea, Republic of (South Korea)
+82-2-3775-3781 (Phone)
+82-2-3775-2630 (Fax)

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