[Inside Chodong] Resolving the Korea Discount Starts with Clearing Out Zombie Companies

Zombie Companies Threaten Market Soundness
Relaxed Delisting Criteria After the Pandemic Lead to Accumulation of Insolvent Firms

The term ‘Zombie’ refers to a living corpse and originated from the voodoo rituals on the island of Haiti in the West Indies. Having become very familiar through movies and other media, zombies are now used metaphorically in various ways to describe social phenomena such as crimes that persistently reoccur despite efforts to eradicate them, or entities that exist but exert no influence or effect.

Zombies also exist in the stock market. They refer to companies that are subject to delisting but continue to survive in a suspended trading state without being expelled. These zombie companies evade delisting through unfair trading practices and parasitize the market. According to the Financial Supervisory Service, a total of 44 companies were delisted over the past three years due to deteriorating performance, and unfair trading activities were found in 37 of these companies. To avoid delisting, they used fraudulent methods such as fictitious capital contributions and accounting fraud to raise funds in the market or gained unfair profits through high-priced sales of nominee stocks.

In the past, if a company received an adverse or qualified audit opinion, failed to submit a business report, or failed to meet financial criteria, delisting procedures were initiated immediately. However, with the enforcement of the revised External Audit Act in 2019, which tightened accounting audits, it was deemed necessary to provide companies with additional opportunities for self-recovery, granting a one-year improvement period to companies with adverse audit opinions. Later, as COVID-19 caused a sharp decline in corporate performance, delisting criteria were relaxed again. Instead of immediately proceeding with delisting for failure to meet financial requirements, the process was converted to a substantive review.

In the past, the Korea Exchange was known as ‘Dasan Dasa’ (many births, many deaths). Many companies were listed and born, but many were also delisted and expelled. However, while many companies have entered due to listing requirements, the number of companies exiting has significantly decreased, disrupting the balance between entry and exit. Last year, nearly 120 companies were newly listed, but only about 40 were delisted.

In zombie movies, when one zombie appears, their numbers multiply exponentially in no time, paralyzing the system. This is why it is crucial to quickly devise solutions for zombie companies. Companies that cannot maintain their listing but are not expelled continue to increase, which can ultimately have a negative impact on the market system. The biggest topic in the domestic stock market this year is resolving the Korea Discount (undervaluation of the Korean stock market) through corporate value-up programs, and zombie companies are considered one of the factors causing the Korea Discount. They hinder the fundraising of healthy companies, eventually get delisted, spread investor losses, and damage the trust in the stock market. Companies that have received adverse audit opinions for three or more consecutive years up to the 2023 business year have already been decided for delisting by the exchange. Even if they survive by maintaining their listing, it shows that it is difficult for already insolvent companies to recover.

The stock market is called the bloodstream of the capital market because it serves as a channel through which funds, the lifeblood of the economy, circulate. When waste accumulates in the bloodstream, it causes various diseases. Similarly, if insolvent companies accumulate in the stock market, it ultimately damages the market’s soundness, and investors bear the brunt of the damage. Financial authorities are preparing measures to shorten and streamline delisting procedures to quickly expel zombie companies that undermine market soundness. We look forward to measures that will enhance market soundness and minimize investor losses.