What makes firms issue death spirals? A control enhancing story

다국어 초록 (Multilingual Abstract)

This paper studies the motive of issuing floating-priced convertibles or warrants, known as death spirals, in a country where the 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 not consistent with the last-resort financing hypothesis, but rather consistent with the control enhancing or control transferring hypothesis. First, operating performance of death spiral issuers are not necessarily poor at the time of the issue nor do they deteriorate over time following the issue. Second, death spiral issuers that are more likely to be motivated by control enhancing or transferring purposes - firms with no subsequent changes in control - exhibit superior operating performance at the time the issue compared to other death spiral or non-death spiral issuers. Third, these firms do not experience a decrease in proportional ownership by the controlling party, while family members other than the controlling shareholder experience the most pronounced increases in the number of shares held. Fourth, in approximately half of these firms, at least one member of the controlling party holds hybrid securities that can be later converted into the firm’s voting shares.

목차 (Table of Contents)

• Abstract
• 1. Introduction
• 2. Death Spirals in Korea
• 3. Hypotheses
• 4. Data
• A. Sample Construction
• B. Other Data Sources
• 5. Results
• A. Summary Statistics
• B. Stock Price Movement following the Death Spiral Issue Announcement
• C. Operating Performance of the Death Spiral Issuers
• D. Subset of Firms Likely to Have Issued Death Spirals for Control-Related Motives
• 6. Conclusion
• References
• Appendix