"Zombie Companies" Still Persist, Distorting GDP and Investment

Proportion of Marginal Companies Among Listed Firms Rises to 21%
"Timely Exit Policy for Insolvent Companies Needed"

There are concerns that the persistent number of marginal companies in Korea is distorting the country's gross domestic product (GDP) and preventing the proper allocation of scarce resources within industries. Analysts argue that the stock market also needs an effective "exit policy" to promptly remove insolvent companies.

Marginal companies, also known as "zombie companies," are financially distressed firms that cannot even cover their interest expenses with operating profits, putting their survival at risk. Typically, this term refers to companies with an interest coverage ratio (operating profit/interest expenses) of less than 1 for three consecutive years.

On December 12, Shinhan Investment Corp. highlighted these issues in its report, "Status of Marginal Companies and Improvements to the Delisting System." The report points out that the problem of marginal companies is not only undermining corporate competitiveness but is also a structural issue caused by a combination of accommodative monetary policies and various support measures.

In Korea, even during the global financial crisis, the business closure rate remained around 13% without significant change. During the COVID-19 pandemic, the rate actually fell to 10%.

As scarce resources within industries were allocated to marginal companies, both investment and GDP became distorted. The Bank of Korea estimated that, between 2014 and 2019, only 2% of high-risk companies (which accounted for 3.8% of all companies) were actually eliminated. If these had been replaced by healthy firms, domestic investment would have increased by 3.3% and GDP by 0.5%. After the pandemic, the proportion of high-risk companies remained similar, but the exit rate dropped further to 0.4% due to financial support and other factors.

This trend has continued in the stock market. Over the past five years, the rate of newly listed companies in Korea was about three times higher than that of major countries like the United States and Japan, but the rate of exits lagged behind new entries. As a result, the number and proportion of marginal companies among listed firms have steadily increased, reaching 401 companies or 21.8% last year.

At the beginning of this year, financial authorities announced improvements to the delisting system as part of the Value-Up Program, completing the basic overhaul of the system. Starting early next year, requirements for market capitalization and sales for delisting will be gradually strengthened in both the KOSPI and KOSDAQ markets. After delisting, support for over-the-counter trading (K-OTC system improvements) will also be implemented.

Kang Jinhyuk, a researcher at Shinhan Investment Corp., stated, "Despite this year's bull market, more than half of listed companies still have a price-to-book ratio (PBR) below 1, indicating there is room for improved resource allocation. We expect additional timely exit policies for insolvent companies to be introduced, so that as capital flows accelerate, investments can be directed toward healthy companies."