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보고서 1
Current State of Overseas CVC and its Implications for Holding Company CVCs [22-24]
Senior Research Fellow Park, Yong Rin / Dec. 12, 2022
The 2021 amendment to the Monopoly Regulation and Fair Trade Act has permitted Korea’s non-financial holding companies to establish Corporate Venture Capital (CVC). CVC firms established by non-financial holding companies are expected to contribute to the sound development and qualitative advancement of Korea’s startup ecosystem which has already achieved quantitative growth, as is the case with other economies. Notably, non-financial holding company CVC is subject to stricter regulations, considering Korea’s unique economic structure where economic power is heavily concentrated in large companies. Against this backdrop, the purpose and investment activities of CVC should be fully understood to ensure that CVC firms created by holding companies overcome the limitations of existing CVC created by non-holding companies and catalyze the development of Korea’s startup ecosystem.     

Overseas CVC firms have been established for various purposes and have become major players in the startup ecosystem through collaboration with independent venture capital (VC), which are key factors behind their success. A quantitative analysis has found that in terms of the size of funding and investment, CVC is larger than independent VC. It also tends to engage in overseas investment and joint investment projects more frequently and exhibit better exit performance. In addition, overseas CVC has diversified into internal or external financing strategies and the selection of initial fundraising strategy depends on overall capital market conditions at the time of establishment.   

Among regulations on non-financial holding company CVC, the duty of creating a wholly-owned subsidiary and the ban on the operation of non-investment financial businesses seem not to run counter to practices of overseas CVC. But there is room for easing external financing regulation to the extent that current regulation allowed as an exception to the separation of financial and industrial capital is enforced. Above all, the 40% ceiling on external financing by each fund, applicable to non-financial holding company CVC, should be revised to 40% of CVC’s total investment in funds with the aim of increasing autonomy in the composition of fund investors. What is needed over the medium term is thorough monitoring for developments in the startup investment ecosystem with regard to non-financial holding company CVC. In addition, competent authorities should gradually alleviate regulations by taking into account how the market reacts to such developments.
보고서 1
Bonus Issues Turning into Thematic Stocks and Role of Informed Traders [22-21]
Senior Research Fellow Nam, Gilnam / Nov. 01, 2022
Since 2020, newly listed and loss-making companies in the pharmaceutical and biotech sectors have issued bonus shares in the name of the shareholder return policy. The prices of bonus shares have soared immediately after disclosure, which has overheated the bonus share market as is the case with the politically themed stocks. More recently, some listed companies that mainly contribute to turning bonus shares into thematic stocks have increased the number of new shares allocated to each shareholder to an unprecedented level in order to grab the attention of retail investors. As a result, the price of bonus shares and the turnover ratio tend to surge immediately after the disclosure and on the ex-rights date. However, this is a short-lived phenomenon that cannot enhance shareholder returns.     

The response to bonus issues is sharply divided by type of investors, suggesting that retail investors and informed traders recognize the value of information regarding bonus issues differently. Retail investors show a massive net buying trend after bonus issues are disclosed, while institutional investors who act as informed traders consistently continue the net selling of bonus shares. Foreign investors tend to change their position over the course of stock trading to actively create more investing opportunities. In some cases, corporate insiders and early investors took advantage of bonus issue disclosure to sell their holdings. In the meantime, how informed traders react to bonus issue disclosure has been affected by regulatory changes in short selling. As the role of informed traders is limited by short-selling regulation, bonus shares show a larger price increase for a prolonged period.  

If a company disguises a bonus issue as its shareholder return policy to attract retail investors, it could be tantamount to abusing the bonus issue system. Accordingly, specifying the purpose of bonus issues should be mandatory when a bonus issue is disclosed. If informed traders take on a greater role, the themed stock phenomenon where a share price keeps surging regardless of its intrinsic value could be curbed in the early stages. Hence, it is necessary not to excessively limit the role of informed traders when regulatory measures are devised.      
보고서 1
Current State and Proposed Improvement for Stock Options of Listed Firms [22-14]
Research Fellow Kim, Minki / Aug. 02, 2022
As stock-based compensation plans for executives of listed companies have come to the fore, this has sparked social controversy over stock options, one of the stock compensation schemes widely used by Korea’s companies. A stock option plan is a compensation mechanism designed to alleviate agency problems between shareholders and corporate managers and improve long-term management performance and shareholder value. In this respect, this article conducts a comprehensive analysis of the current state and characteristics of stock options utilized by Korea’s listed companies, explores whether the stock option scheme serves its intended purpose, and presents improvement plans.  

An analysis of stock options granted by listed companies between 2015 and 2021 has produced the following findings. First, listed companies are increasingly granting stock options, most of which have a cliff vesting provision except for a small portion of performance-linked or partially-exercised stock options. Notably, a majority of stock options can be freely sold after exercise as long as they satisfy the minimum exercise period requirements specified in the Commercial Act, which is unlikely to motivate management to hold treasury shares. Second, stock options are primarily used by listed companies that are cash-strapped and have high growth potential. But granting stock options to corporate managers does not necessarily lead to shareholders’ value improvement. Third, it has been confirmed that stock option holders are likely to exercise stock options during the initial period of exercise and dispose of such stocks in a short period after exercise. In particular, stock returns reported before and after the exercise of stock options or disposal of stocks have been favorable to stock option holders, implying that they may strategically choose the time of exercise or disposal. The overall results suggest that how stock options are practically used by companies is inconsistent with the original objective.    

In this respect, it is essential to create an environment where the stock-based compensation scheme including stock options function well to achieve its intended purpose. To this end, a policy is needed to encourage listed companies to voluntarily design stock option plans based on specific principles and require key executives to mandatorily hold a certain amount of equity even after stock options are exercised. Also necessary is to forestall misuse of stock options by providing wider access to stock option-related information and adopting a prior disclosure for disposal of stocks by executives. 
보고서 1
Business Development Companies: Characteristics and Implications from Foreign Schemes [22-10]
Senior Research Fellow Park, Yong Rin / Jul. 05, 2022
A Business development company (BDC) slated to be introduced to Korea is a listed risk capital investment vehicle. BDCs are designed to contribute to creating a risk capital ecosystem through the public capital markets and offer an opportunity to make diversified investments in non-listed innovative firms. In this regard, Korea should examine similar schemes implemented in foreign countries such as the BDC of the US and the venture capital trust (VCT) of the UK to figure out how to properly operate BDCs (K-BDCs) that accommodate conditions of its risk capital market.     

The US introduced the BDC as a closed-end investment company that was allowed to invest in privately-place securities by enacting the Small Business Incentive Act in 1980. The BDCs of the US are subject to relaxed regulations, compared to ordinary registered investment funds. The UK has operated the VCT that is a closed-end, listed investment vehicle characterized by favorable tax treatment for retail investors since 1995, aiming for expanding venture capital funding for early-stage firms. How the BDC and VCT schemes have been operated varies according to features of the risk capital markets of respective countries. More concretely, the BDC of the US has evolved into a debt-focused investment vehicle while the UK’s VCT has served as an equity-focused listed investment vehicle designed to facilitate venture capital investment.        

To ensure the successful operation of the K-BDC scheme, the following aspects should be taken into consideration in terms of operational regulations, tax benefits, prevention of conflicts of interest and expandability. First, operational regulations should be established to ensure that K-BDCs are subject to a compulsory investment ratio similar to that of foreign schemes. Also, the regulations need to determine the minimum equity investment ratio and enable follow-on investment for supporting scale-up. Second, tax benefits should be offered only to equity-focused investment vehicles, for which sub-categories of investment vehicles could be defined. Third, considering that a wide range of business entities is expected to operate K-BDCs, including existing private VC funds and PE funds, asset management firms and securities firms, regulatory safeguards should be put in place to minimize the possibility of conflicts of interest that may arise from a firm operating both a private venture capital fund and a public K-BDC. Fourth, it is worth considering the possibility that K-BDCs would evolve into a listed investment vehicle that encompasses various investment strategies and target growth stages in the long run.