Reverse Stock Splits to Escape 'Penny Stock' Status... More Companies See Shares Plunge [Weekend Money]

Raising Share Prices with Reverse Stock Splits Does Not Boost Corporate Value
Companies Attempting to Avoid Delisting Suffer Average Share Price Drop of 31%

With the implementation of the strengthened delisting regulations starting in July, a sweeping trend of stock splits in reverse (reverse stock splits) has been seen in the domestic stock market. However, a significant number of companies have failed to avoid share price declines even after such reverse splits, and some have reverted to becoming so-called "penny stocks." Critics argue that artificially inflating share prices without addressing fundamental issues does little to protect corporate value.

The Financial Services Commission and Korea Exchange have significantly toughened the delisting system since the 1st of this month. They have raised and expedited the market capitalization standards and included penny stocks—defined as those with a share price below 1,000 won—under the new delisting criteria. Additionally, they strengthened the requirements related to complete capital erosion based on semi-annual results and disclosure violations, substantially lowering the threshold for removing troubled companies from the market.

The core of this overhaul is a shift toward a "high-turnover market." The goal is to encourage more IPOs for innovative companies while expediting the removal of financially unsound firms to boost credibility in the capital market. Sujin Um, an analyst at Hanwha Investment & Securities, explained, "The domestic capital market has had a structural issue of accumulating troubled firms as there were many IPOs but few delistings."

These changes are already affecting the market, with the reverse stock split being the most notable example. A reverse stock split consolidates outstanding shares to raise the price per share, which does not change the actual corporate value but can allow a company to escape the "penny stock" classification.

From the announcement of the delisting reform on February 12 of this year through July 15, a total of 256 cases of reverse stock splits were pursued: 54 on the main exchange and 202 on the KOSDAQ market. This is a dramatic surge compared to just 10 cases during the same period last year.

Analyst Um noted, "Delisting criteria based on capital, market capitalization, and share price can be temporarily addressed or avoided by companies. In particular, the penny stock standard can be sidestepped relatively easily through a reverse stock split, which is why the number of such cases soared this year."

However, reverse stock splits have not proven to be a "magic bullet" for struggling companies. Among 156 companies that completed a reverse stock split, 130 (or 83.3%) saw their share prices decline after the new shares began trading. The average decline amounted to 31.2%. Notably, 18 companies even saw their share price fall back below 1,000 won, thus regaining "penny stock" status, and in 14 of those cases, the price initially exceeded 1,000 won at the time of listing. In some instances, share prices plummeted to less than a quarter of their post-split value.

This suggests that reverse stock splits merely change numbers without improving the company’s fundamental competitiveness.

"Share splits are often interpreted as a positive sign, mostly used by companies with share prices that have already risen substantially in order to boost trading activity," analyst Um said. "However, reverse stock splits, which are mainly employed to avoid delisting, rarely send a positive signal. While there is nothing wrong with using legal means to stay listed, reverse splits that are not accompanied by real efforts to improve financial health, expand revenue, enhance profitability, or discover new business opportunities are little more than a house of cards that will not last."

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