Short-term gains, long-term pains: Study reveals stock performance of SMEs after hybrid securities issuance in KOSDAQ market

Background and Motivation

Hybrid securities, such as bonds with warrants, convertible bonds, and exchangeable bonds, are popular financing tools for SMEs seeking flexible capital in growing markets. While existing research has largely focused on developed markets, the performance and implications of these instruments—particularly exchangeable bonds—in emerging economies like South Korea remain underexplored. This study aims to address this gap by investigating how hybrid securities issuance influences short- and long-term stock performance in the KOSDAQ, a market dominated by innovative but often vulnerable SMEs.

Methodology and Scope

The study analysed a sample of 204 issuers in the KOSDAQ market from 2016 to 2020. Using event study methodology, the researchers assessed short-term cumulative abnormal returns around the announcement date of hybrid securities issuance. For long-term performance, buy-and-hold abnormal returns were calculated over two- and three-year periods post-issuance. The analysis distinctly categorised hybrid securities into bonds with warrants, convertible bonds, and exchangeable bonds to evaluate their individual and comparative impacts on stock performance.

Key Findings and Contributions

The study uncovered a notable divergence in stock performance. In the short run, firms experienced significantly positive cumulative abnormal returns, indicating strong investor confidence following hybrid securities announcements. However, long-term analysis revealed substantial underperformance, with stocks declining significantly over two- and three-year horizons. This trend was especially pronounced for firms issuing bonds with warrants and exchangeable bonds. The findings suggest that managers may capitalise on overvaluations in hybrid securities markets, resulting in long-term stock underperformance. Additionally, firm-specific characteristics such as growth opportunities, financial investor involvement, and corporate governance were found to play a critical role in influencing performance outcomes. As the first study to incorporate exchangeable bonds in the context of an emerging market, this research provides a nuanced perspective on hybrid securities and their long-term implications.

Why It Matters

The findings highlight critical risks and opportunities associated with hybrid securities in emerging markets. For investors, the study underscores the importance of looking beyond short-term market reactions and evaluating long-term trajectories and firm-specific factors. For policymakers, these insights can inform regulatory approaches to hybrid securities markets, ensuring greater transparency and sustainability in SME financing. The study also contributes to global financial literature by shifting the focus from developed to emerging economies, offering a comparative foundation for understanding market-specific dynamics.

Practical Applications

• Investors can use these findings to refine their investment strategies, accounting for both short-term gains and long-term risks associated with hybrid securities.
• SMEs seeking financing can better understand the potential long-term implications of hybrid securities issuance on their stock performance and market perception.  
• Policymakers and Financial Regulators may leverage these insights to develop guidelines that promote sustainable financing practices and protect investor interests in emerging markets.  
• Academic Researchers can build upon this study to explore hybrid securities in other emerging economies or to investigate the role of corporate governance in mitigating long-term underperformance.

Discover high-quality academic insights in finance from this article published in China Finance Review International. Click the DOI below to read the full-text original!