دیدگاه کنترل مرتبط: مسائل مربوط به مارپیچ مرگ در بازارهای نوظهور

This paper studies the motive of issuing floating-priced convertibles or warrants, known as death spirals, in a country where private benefit of control is high. Using a total of 199 death spiral issuances by public firms listed in the Korea Stock Exchange during 1998–2006, we find a number of pieces of empirical evidence that are less consistent with the conventional last resort financing hypothesis, but rather consistent with the control enhancing or control transferring hypothesis. First, abnormal returns subsequent to death spiral issuance is negative, but more so in poorly governed firms. Second, operating performance of chaebol issuers are not necessarily low at the time of the issue nor does it deteriorate over time, but they still prefer to issue death spirals over traditional fixed-priced hybrid securities. Third, we do not observe subsequent changes in the controlling shareholder in more than 60% of the issuers and these firms exhibit superior operating performance at the time of the issue compared to other death spiral or non-death spiral issuers. Fourth, proportional ownership of the controlling party in these firms does not decrease, while the number of shares held by family members other than the controlling shareholder increases. Finally, in approximately half of these firms, at least one member of the controlling party holds hybrid securities that can later be converted into voting shares.

Floating-priced convertibles, commonly known as death spirals, are convertible bonds with price contingent conversion ratios. Unlike the conventional convertibles where the conversion ratio or the number of shares entitled to is fixed at the time of the issue, conversion ratio in floating-priced convertibles changes as the market price fluctuates so that the holder is entitled to more shares as the share price falls. This feature provides the holders with an insurance against any future drop in stock prices and guarantees a fixed total value to the holder. Although initially introduced during late 1990s as a financial innovation to address adverse selection problems in the sense of Myers and Majluf (1984), it quickly disappeared from the market after initial flurry of issues ( Brealey et al., 2006). According to PlacementTracker, however, these securities came back in action. The amount of money raised by structured PIPEs — another name for death spirals — peaked in 2000 at USD 2.6 billion, dropped down to USD 80 million in 2003, and then hit its new record at USD 15.6 billion in 2007.1 Moreover, recent deals involving troubled US financial institutions closely resemble death spirals. For example, Merrill Lynch's deal with Temasek of Singapore in December 2007 includes a reset clause stating that should Merrill Lynch afterwards raise money at a lower price, Temasek would be compensated retroactively by having its initial investment priced at this lower price. Cross-sectionally, death spirals are found outside US as well. In Japan, it is known as moving strike convertible bonds (MSCBs) and came under scrutiny when Lehman Brothers provided JPY 80 billion through MSCB in internet firm Livedoor's takeover battle against top broadcaster Fuji Television Network in 2005. In Korea, death spirals are known as convertible bonds or bonds with warrants with an option to re-fix the conversion or exercise price, which became an important external financing vehicle following the financial crisis of 1997. According to the existing literature, firms issue death spirals when they have no other means of raising capital. Based on US data between 1994 and 1998, Hillion and Vermaelen (2004) confirm this conjecture, which they named as the last resort financing hypothesis. Specifically, they show that (i) the issuance of floating-priced convertibles is followed by significantly negative abnormal returns, (ii) the value of the underlying assets, i.e., common stock plus convertibles, fall significantly during the year after the issuance, (iii) operating performance declines significantly relative to comparable non-issuing firms during the years following the issuance, and (iv) poorly performing firms are more likely to issue a floating-priced convertible. In a recent work, Brophy et al. (2009) analyze the characteristics of firms that obtain financing from hedge funds and find similar results. In this paper, we study the motive of issuing death spirals from a new angle. We investigate whether death spirals may be used to enhance the controlling shareholder's influence over the business group under his/her control or to transfer the control over the issuing firm to the controlling shareholder's heir (control enhancing or control transferring hypothesis). The following anecdote illustrates how this could actually occur in practice. In July 1999, Doosan Corporation, a member firm of one of the large family-controlled business groups or chaebols in Korea, issued a bond with floating-priced warrants (USD 100 million). 2 It was an overseas public issuance, but it was prearranged so that the warrants were detached immediately after the issuance and mostly sold to the members of the controlling family. The detached warrants were initially purchased by both the third and the fourth generation family members, but in September the third generation sold all of their warrants to the fourth generation family members. In October, the first downward adjustment of the exercise price took place. The outstanding principal amount was paid back in full only one year after the issuance in July 2000. In subsequent years, share price dropped dramatically which lead the exercise price to fall from the original level of KRW 50,100 in July 1999 to KRW 9460 in October 2002. If the fourth generation family members had fully exercised their warrants in October 2002, they could have increased the family ownership of Doosan Corporation from 15.7% to 39.1%.3 In October 2002, this scheme was uncovered by CGCG, which led the Financial Supervisory Service to investigate on the matter. In February 2003, the controlling family announced that they would voluntarily void their entire holdings of Doosan Corporation warrants. The case of Doosan was not the only case uncovered during this period. People's Solidarity for Participatory Democracy (PSPD), a civil activist group in Korea, reported that at least 16 other companies have issued similar death spirals. Among these, there were four cases where the controlling family later voluntarily redeemed all of their warrant holdings.4 To empirically test the control enhancing or control transferring hypothesis as illustrated above, we focus on Korea which is widely known for its high level of private benefits of control and prevalence of large family-controlled business groups known as chaebols. 5 Using a total of 199 death spiral issuances by public firms listed in the Korea Stock Exchange during 1998–2006, we find a number of pieces of empirical evidence that are less consistent with the conventional last resort financing hypothesis, but rather consistent with the control enhancing or control transferring hypothesis. First, abnormal returns subsequent to death spiral issuances are negative, but more so in poorly governed firms, in which the private benefits of control are high (for example, chaebols or family-controlled large business groups). According to the control enhancing or control transferring hypothesis, the controlling shareholder of such firm typically has a strong motive to preserve and secure his control and thus may use death spirals for such purpose. Since lower exercise price (due to stock price drop) allows the controlling shareholders to obtain or transfer a larger ownership stake, issuance of death spirals by these poorly governed firms may be interpreted as a signal of overvaluation in the sense of Myers and Majluf (1984). Second, death spirals are not necessarily issued by firms with poor performance. A number of operating performance measures are all significantly positive in the year before the death spiral issue, which provides a striking contrast to the results reported in Hillion and Vermaelen (2004) based on US issuers. More importantly, we find that chaebol firms still prefer to issue death spirals over traditional fixed-priced hybrid securities, even though they exhibit persistently better operating performance relative to non-chaebol issuers. Third, in more than 60% of the issuers, controlling shareholders remain intact until the expiration date or 3 years after the issue. This could either be due to marginal firms effectively coming out of difficulties through successful death spiral issues — consistent with the last resort financing hypothesis — or healthy firms issuing death spirals to enhance or transfer control. To distinguish between the two possibilities, we compare the operating performance of death spiral issuers with no subsequent changes in control against other death spiral and non-death spiral issuers and find that the former group exhibits superior operating performance at the time of issue compared to the latter two groups. This suggests that at least in 60% of the issuers, last resort financing does not seem to be the primary reason for issuing death spirals. Fourth, for the same subset of firms where control remains intact, we examine the proportional ownership and the number of shares held by the controlling party subsequent to the death spiral issue. Under last resort financing hypothesis, we should observe a decrease in proportional ownership due to heavy dilution incurred through conversion or exercise by outside death spiral holders, but no increases in the number of shares held since insiders are financially constrained. To the contrary, we find that proportional ownership of the controlling party as a whole in these firms does not decrease. Rather, the number of shares held by the family members other than the controlling shareholder increases subsequent to the issue. This suggests that the controlling party were not financially constrained at the time of the issue, again inconsistent with the last resort financing hypothesis. Finally, as a partially direct test of control related hypothesis, we examine whether controlling party holds on to hybrid securities that can later be converted into voting shares.6 Our findings indicate that in approximately half of the firms with no control changes, at least one member of the controlling party holds on to some hybrid securities.7 To the extent that the operating performance of those firms that experienced a change in control are quite poor, we do not preclude the possibility that a certain subset of death spiral issuers may be issuing them for last resort financing purposes, as suggested in Hillion and Vermaelen (2004). However, since a vast majority of death spiral issuers in our sample does not experience a change in control, and these firms' characteristics and behaviors are not consistent with last resort financing, we remain reluctant in not rejecting the last resort financing hypothesis for the Korean market. At a minimum, this paper suggests and identifies a new perspective behind death spiral issues that may be more pertinent in emerging markets. The paper is organized as follows. Section 2 provides a brief overview of death spirals in Korea. Section 3 outlines our hypotheses and Section 4 describes the data and the sample. Section 5 provides the empirical results and Section 6 concludes.

In this paper, we study the motive of issuing floating-priced convertibles or warrants, known as death spirals, in an economy where private benefit of control is high. Using a total of 199 death spiral issuances by public firms listed in the Korea Stock Exchange from 1998 to 2006, we provide empirical results that are less consistent with the last resort financing hypothesis, but rather consistent with the control enhancing or control transferring hypothesis. First, we find that death spirals are not necessarily issued by marginal firms with poor operating performance at the time of issuance. In fact, our results show that none of the point estimates of the performance measures are negative for death spiral issuers prior to the issue. For chaebol issuers, operating performance does not even show any sign of deterioration over time following the issue. In a multivariate analysis, we find that death spiral issuers are not different from conventional non-death spiral issuers in terms of their operating performance at the time of issuance, while chaebol issuers are more likely to prefer a death spiral to a conventional fixed-priced hybrid security. We also find that death spiral issuers with no subsequent change in control exhibits superior operating performance at the time of the issue compared to those with a subsequent change in control. Second, proportional ownership by the controlling party as a whole is not much diluted after the death spiral issuance. In fact, the number of shares held by the controlling party increases significantly, especially for other family members, after adjusting for the mechanical changes in the number of total shares outstanding. We also find that in approximately half of the firms where control remains intact, at least one member of the controlling party holds hybrid securities that can be later converted into firm's voting shares. Even within exclusive death spiral issuers, we obtain a similar result. Although our sample consists of death spirals issued by firms in a single country, we believe the findings we document may be generalized to other emerging markets where the economy is dominated by family-controlled business groups. As long as the controlling shareholder has a motive to enhance his/her control over the group or has a motive to transfer control over to his/her heir due to the high level of private benefits of control, there is a potential that “financial innovations” such as death spirals may be misused for such purposes.