[Insight & Opinion] Two Proposals to Enhance the Effectiveness of Corporate Value-Up Policies

An Environment for Liquidity to Return to the Stock Market Is Needed
Significance of KB Financial’s Record-High Stock Price in Focus

The Korean stock market has been retreating since the beginning of the year, and the number of companies struggling with falling stock prices is increasing. This situation renders the Financial Services Commission’s announcement of the ‘Corporate Value-Up Support Plan’ in February this year ineffective. The main reason is that the domestic stock market’s correction mechanism has broken down. There are numerous stocks that decline despite strong operating profits. With liquidity drying up, how can stock prices rise? In the stock market, liquidity figures are more important than economic outlook numbers. This situation raises doubts about whether our corporate value-up program can boost the stock market like the Japanese case. Therefore, I believe the financial authorities should urgently create two environments for the development of our stock market.

First, Japan’s public pension fund, the Government Pension Investment Fund (GPIF), plays a major role as a big player in the Japanese stock market. Although it was abolished this year, the Bank of Japan’s ETF purchases were introduced in 2010. The valuation gains on the ETFs held are also substantial. As of March, reports indicated that profits from stock price increases reached about 34 trillion yen (approximately 305 trillion won).

China has announced measures to stimulate its capital market, including lowering the reserve requirement ratio by 0.5 percentage points, supplying 1 trillion yuan (about 193 trillion won) in long-term liquidity, injecting funds to stabilize the stock market, lifting restrictions on insurance funds entering the stock market, and implementing reforms such as mergers and acquisitions and restructuring of listed companies, public fund reforms, and protection measures for small investors. The stock market responded with a sharp rise. While not all of these government policies are desirable and the circumstances differ from ours, the government and ruling and opposition parties must recognize the urgent liquidity situation in our stock market.

Though an old story, in the past, the government provided tax benefits to individual investors who subscribed to installment-type equity funds for more than three years, including income deductions on contributions (up to 12 million won annually) and tax exemptions on dividend income to stabilize the stock market. Our stock market lacks large capital like pension funds, and a vicious cycle is repeating where individual investors, gripped by fear, sell stocks. We must prevent major players from leaving the stock market due to the introduction of the financial investment income tax. Instead, we should revise inheritance and gift taxes, which cause corporate value decline, to lay the foundation for value-up.

Second, on the 24th of last month, the Korea Exchange announced the components and detailed selection criteria for the Korea Value-Up (corporate value increase) index. Among the stocks surprisingly excluded that day was KB Financial Group. Nevertheless, KB Financial is regarded as a model value-up company in the market. On the 24th, KB Financial’s stock price reached an all-time high above 100,000 won, driven by strong third-quarter earnings and value-up expectations. Although it is said that escaping the domestic stock market is a matter of intelligence, this scene contradicts that notion.

The shareholder return ratio, including cash dividends and treasury stock repurchases and cancellations, is also at the highest level in the industry, which the market welcomed. KB’s announcements?such as treasury stock repurchases and cancellations, introduction of quarterly dividends, mid- to long-term capital management plans, and quarterly equal dividends based on total dividend amounts?are practices that advanced countries’ companies have adopted. Since KB Financial’s first value-up disclosure at the end of May, participation in the ‘K-Value-Up’ program over four months until September has been only 0.5% to 1.5%, which is one-tenth to one-twentieth of Japan’s level. If our companies make efforts like KB Financial, might a refreshing rain fall on the domestic stock market, which is suffering from a “trust deficit”?

Can corporate value-up be the savior of the stock market amid a bleak market outlook? The stock market awaits not only corporate value but also supply and demand, leading stocks, and stories. At this point, it must be clearly recognized that corporate value-up policies alone are not the necessary and sufficient condition for stock price increases. We eagerly await liquidity to return to our stock market soon and for a virtuous cycle to be realized through corporate value-up.

Jo Won-kyung, Professor at UNIST and Director of the Global Industry-Academia Cooperation Center