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What makes firms issue death spirals? : A control enhancing story

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Frame of Image nhancing story†
Woochan Kim ∗ , Woojin Kim + , Hyung-Seok Kim #
This version: July, 2009 First version: October, 2008 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. JEL Classifications: G32, G34 Keywords: Death spi
Contents

Full Text
Title What makes firms issue death spirals?
Similar Titles
Sub Title

A control enhancing story

Material Type Reports
Author(English)

Kim, Woochan

Publisher

Seoul:KDI School of Public Policy and Management

Date 2009
Series Title; No KDI School Working Paper Series
Pages 47
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Industry and Technology < Entrepreneurship
Holding KDI School of Public Policy and Management

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.