[THE VIEW]Is the Corporate Value-Up Program Successful?

Internal Reinvestment May Be More Efficient
Than Dividend Increases or Share Buybacks
Lack of Incentives for Stock Price Rises
Due to Major Shareholders' Inheritance and Gift Tax Burdens

Earlier this year, the government announced plans to introduce a corporate value-up program. This policy appears aimed at addressing the overall undervaluation problem of the Korean stock market, commonly referred to as the "Korea Discount," and revitalizing the market through a stock price rebound.

Companies raise funds through debt financing, such as bond issuance or borrowing, and equity financing through new stock issuance. Among these, stock market activation corresponds to the latter, equity financing. When a healthy stock market is established, companies can raise funds stably and at an appropriate cost. Conversely, if the market is distorted, sound companies must bear excessive costs to raise funds, or insolvent companies can easily raise funds at low costs. This can hinder the efficient allocation of resources. Therefore, it is important to create an environment where good companies can raise funds at low costs and grow, while insolvent companies naturally phase out.

The government's policy aims to facilitate capital raising by ensuring that Korean companies, which are generally undervalued, receive appropriate valuations, ultimately providing high returns to shareholders. To this end, it seeks to attract investors through shareholder return policies such as dividend increases and share buybacks. In fact, several companies have announced plans to increase dividends or repurchase shares, expressing their intention to participate in the policy.

However, companies could have taken such measures on their own even without these policies, as receiving favorable evaluations in the stock market is also advantageous for them. The reasons for not implementing these measures may be varied. First, it is possible that enhancing corporate value through internal reinvestment was more efficient than increasing dividends or share buybacks. In this case, the government's policy could increase inefficiencies in resource allocation and negatively affect long-term corporate value. Second, there may have been insufficient incentives for stock price increases. Some analyses suggest that factors such as inheritance and gift tax burdens on major shareholders or threats of mergers and acquisitions (M&A) influenced this. If these issues are resolved, this value-up program could send a positive signal to shareholders.

As the year draws to a close, it is necessary to review how many changes have occurred and how effective the policy has been. Since the policy announcement in February, aside from the creation of the value-up index in September and securities firms launching related products, there have been no significant changes. Despite several companies announcing participation in the policy, stock prices did not respond markedly.

Based on the results so far, simply revitalizing the stock market does not seem to have resolved the undervaluation issue. A thorough analysis is needed to determine whether Korean stocks are indeed undervalued. Even considering undervaluation due to governance issues, the reasons for low stock prices must be revisited. Looking at global capital markets, there has been a shift from value stocks to growth stocks over the past decade, but Korean companies have failed to keep pace, resulting in a lack of growth momentum. Creating an environment where companies can grow sustainably in the long term would be more effective than short-term shareholder return policies.

Seonggyu Park, Professor at Willamette University, USA