Retail Investors Frustrated by 'Stock Price Suppression'... Will Brighter Days Come? [Weekend Money]

National Assembly Speeds Up Review of 'PBR 0.8 Rule'


"Focus on Companies with Prolonged PBR Below 0.8"

"They intentionally suppress stock prices to avoid an 'inheritance tax bomb.'"

This is a story that has been repeated in the Korean stock market for a long time. Under the current Inheritance and Gift Tax Act, the value of listed companies is assessed based on the average stock price over a certain period before and after the date of inheritance or gift. For major shareholders facing inheritance or gift, the lower the share price, the lower the tax burden. This is why founders of advanced age or companies preparing for succession have often been suspected of being passive in shareholder returns.

The debate surrounding this long-standing issue has reignited, with discussions on the so-called 'PBR 0.8 Rule' (amendment to the Inheritance and Gift Tax Act) gaining momentum. On July 9, Lee Soyoung, a lawmaker from the Democratic Party of Korea, publicly announced the progress of the bill, revealing plans to have it both reflected in the government's upcoming tax reform proposal at the end of this month and reviewed by the National Assembly's Strategy and Finance Committee.

PBR (Price-to-Book Ratio) is a commonly used indicator by investors to determine how undervalued a company is. A PBR of 1 means the market recognizes the company’s value equal to its net assets, while 0.5 means the company is valued at only half of its net assets. Of course, not all companies with low PBRs deliberately suppress their stock prices. However, it is a clear fact that a low share price reduces inheritance tax liability.

How Will the Calculation Method, Which Allowed Lower Taxes with Lower Share Prices, Change?

The core of the amendment proposed by lawmaker Lee Soyoung in May 2025 is that if a listed company’s market capitalization does not reach 80% of its net asset value (PBR 0.8), the company’s value will be assessed considering asset and profit values, but a floor will be set at 80% of net asset value. This is a system that sets a lower limit for the corporate value used for tax assessment, not the tax rate itself, and essentially extends a principle already applied to unlisted stocks to undervalued listed companies. It is also called the 'Stock Price Suppression Prevention Act.'

If this law is implemented, major shareholders will have to change their calculations. When PBR is below 0.8, no matter how much they lower the stock price, the inheritance tax will not be reduced further. Since taxes will be assessed based on the 80% net asset value regardless, it becomes a rational choice to increase the stock price and thus the asset value of the shares they hold. This aligns with the basic economic principle that people respond to incentives created by policy.

According to Sujin Um, a researcher at Hanwha Investment & Securities, in a report published on July 10, for companies with a PBR below 0.8, the tax base is calculated based on net asset value rather than stock price. Therefore, "the incentive for inheritors or donors to keep the stock price low is weakened or eliminated, and there is an incentive to raise the stock price up to the level where the PBR reaches 0.8."

The incentive operates strictly up to a PBR of 0.8. Once it exceeds 0.8, the tax is again linked to the stock price. Conversely, as 0.8 becomes the new "threshold," a "leveling up" phenomenon may occur, with the stock prices of low-PBR companies converging toward this level.

Of course, the market does not view the bill entirely favorably. Some point out that it is unreasonable to equate a low PBR directly with "deliberate undervaluation." Sectors with uncertain outlooks, such as construction, or industries like steel and chemicals that are capital-intensive by nature, tend to have structurally low PBRs. It is also difficult to distinguish whether a low share price is due to external factors or management decisions.

There is also criticism that selling shares to pay taxes assessed above market price destabilizes management control, and that the principle of "taxing assets at their market value if a market exists" is being violated.

The report thoroughly excludes any value judgment on the bill itself and focuses solely on analyzing the 'effect'—how the behavior of major shareholders and companies would change if the bill becomes reality.

One Tax Law Can Change Corporate Behavior

Researcher Um described the ripple effect of this bill as a "domino effect" in the report. To break it down: the first domino is the tax law amendment, the second is the behavioral change of major shareholders, and the third is the change in corporate capital policy. For companies that no longer have a reason to suppress their stock prices, there is less reason to avoid shareholder-friendly policies such as share buybacks, increased dividends, and active investor relations.

This effect does not end when the tax amount is determined. In Korea, the installment payment system allows inheritance and gift taxes to be paid over a maximum of 10 to 20 years, and inheritors must secure funds to pay taxes during this period. According to the report, in Korea, due to the heavy tax burden of dividend and comprehensive income taxes, pledged share loans or partial stake sales are preferred over dividends—and both methods are more advantageous when the stock price is higher.

Researcher Um explained, "For pledged share loans, the higher the stock price at the time of the loan, the more can be borrowed, and if the stock price falls later, there is a risk of forced sale. Therefore, there is an incentive to actively manage the stock price even after obtaining the loan," and predicted, "This incentive will persist throughout the installment payment period."

The law amendment will further strengthen this incentive. For companies with low PBRs, the tax base could increase by several multiples, leading to a significant jump in the tax amount and likely extending the installment payment period. This means there will be even more reason to manage the stock price, and for a longer time.

'Long-Term Low PBR' Companies Facing Imminent Succession Draw Attention

So, under these conditions, what companies should investors pay attention to? Researcher Um advises that companies with a long-term PBR below 0.8 without a clear reason merit more attention than those that have temporarily dipped below 0.8. Since it is possible that the major shareholders have deliberately suppressed the stock price, a meaningful price increase can be expected if the amendment passes.

Conversely, if a company belongs to a declining industry, has relied heavily on debt for years, or if its low PBR is clearly due to factors such as the market not reflecting the value of assets like plant sites or headquarters buildings, it is difficult to expect a revaluation solely due to the legal amendment.

If succession issues are also involved, the target group becomes even narrower. Researcher Um identified the following cases: companies where the largest shareholder or founder is elderly or has long stepped back from management; companies where the largest shareholder’s children have recently been promoted to executive or appointed to the board; and companies where there is a large gap in shareholding between the largest shareholder and their children, meaning a significant amount of shares still need to be transferred. The analysis suggests that the greater the tax burden expected during succession, the more sensitively these companies will respond to changes in incentive structure.

This content was produced with the assistance of AI translation services.