Innovative Companies Worry About Stock Prices More Than Technology Right Now

IT DAILY is running a three-part series on the theme, "In the AI era, how should innovative companies be valued?" This installment examines the impact of KOSDAQ-listed companies' market cap-based delisting standards.

The review focuses on how company valuation, cybersecurity, and R&D investment are affected. The series looks step by step at how KOSDAQ's market cap-based standards affect the operation of technology companies.

The title of the third installment is, "Innovative Companies Worry About Stock Prices More Than Technology Right Now." The sources of competitiveness for technology companies are R&D and specialized talent.

As conditions for a technology company's survival, securing technology ahead of competitors and developing products before the market opens are cited. In particular, the AI and cybersecurity sectors are characterized by rapid technological change.

For that reason, the importance of advance investment is increasing in AI and cybersecurity. Technology companies originally rely on R&D, talent, and preemptive development, but in fields where change is rapid, the meaning of upfront investment becomes even greater.

However, as market capitalization has become linked not only to market valuation but also to whether a company can remain listed, the task of managing stock prices and market cap is emerging at the management level for small and midsize technology companies listed on KOSDAQ. As a result, the importance of managing stock prices and market cap is rising alongside technological competition.

To avoid falling below the market cap threshold, companies need to improve performance and prove their growth potential to the market. However, a company cannot fully control its stock price through its own efforts alone. During market downturns, small-cap stocks may be neglected, and if money flows into certain sectors or large-cap stocks, even small-cap stocks with solid earnings and financials may fall out of favor.

In this situation, companies consider share buybacks, dividends, IR, investor relations, short-term performance improvements, and business restructuring. These activities are necessary for enhancing corporate value, but if they are used as a means of defending listing status, they can conflict with management resources meant for R&D and talent acquisition.

The cost of defending the stock price is not limited to share buyback amounts and IR budgets. Time from the CEO, finance, and planning teams is spent monitoring stock prices and trading volume and persuading investors. In addition, technical opportunities may be abandoned in the process of choosing short-term revenue businesses over long-term R&D, and the cost burden can also prevent the hiring of specialized personnel.

The impact of tougher market cap standards is not limited to an immediate reduction in R&D spending. If the market cap standard is strengthened, corporate responses may go beyond simply cutting R&D expenses and lead to delays in launching long-term projects.

Along with that, new-business decision-making may become more conservative. The focus of technology development may also shift, moving away from core technology acquisition and toward rapid revenue generation, and in the AI era, innovative companies may find themselves under pressure to put stock prices ahead of technology.

In this environment, share buybacks are a company's representative means of defending its stock price. The effect of a share buyback lies in reducing the number of shares circulating in the market, and it can also send a signal that the current stock price is below the company's intrinsic value.

Expanding dividends is a way to increase shareholder interest and improve investment appeal. IR is also cited as an activity that companies need.

Technology companies in particular cannot fully explain their future value with current sales and profits alone. What companies need to actively communicate are the technologies under development, the timing of commercialization, and target markets. Without such information, investors find it difficult to judge a company's potential.

When delisting risks grow, share buybacks, dividends, and IR can shift from voluntary value-enhancement measures to emergency responses to avoid delisting. If concerns about maintaining a listing rise as stock prices fall, the CEO and the finance and planning teams must expand meetings with institutional investors and responses to disclosures. In the process, costs for accounting, legal advice, and business plan review also increase.

A KOSDAQ-listed security company cited as an example does not fall directly under the strengthened market cap standards. However, the company is internally reviewing options such as share buybacks and expanded IR in preparation for additional stock price declines. A company official said this does not mean an immediate cut in R&D spending. The official explained, however, that stabilizing the stock price has now been added to the priorities for cash use.

The problem is that companies have limited cash on hand. Money used for share buybacks cannot be used at the same time to hire researchers or develop new products. Expanding dividends strengthens shareholder returns, but it reduces retained earnings for future investment.

Considerable manpower is also devoted to IR and investor relations. Therefore, as concerns about maintaining a listing grow, the choice to strengthen shareholder returns and IR activities can create tradeoffs in cash and personnel allocation against future investment such as R&D, hiring, and new product development.

Resources devoted to defending the stock price may not appear in the accounting books as reductions in R&D spending, because all such expenses and tasks may not show up that way. But in terms of limited resources, opportunity costs are still incurred.

Defending the stock price requires cash, personnel, and executive time, and as a result, the room for investment in technology, products, customers, and overseas markets shrinks. Even when a share buyback is chosen, resources for R&D and new businesses decrease.

When a listing is at stake, failing to decide on a share buyback itself becomes a burden. If a company with cash holdings does not act to defend its stock price, the market may view it as lacking a commitment to shareholder returns.

In this way, both choices carry costs. R&D is the key factor from a long-term competitiveness perspective, but from the standpoint of immediate listing status, it is difficult to ignore stock-price defense, placing companies under pressure to choose.

That said, the growing burden of market cap management does not directly translate into an immediate cut in R&D spending for all companies. Because R&D investment is directly tied to a technology company's competitiveness, companies tend to try to maintain R&D investment until the very end.

There are also technology investment effects that are unrelated to maintaining total R&D spending. The first area to change is the character of the company's R&D projects. Even if the total amount of R&D spending remains the same, the depth of innovation may decline, and the level of risk-taking may also decrease.

Developing a new AI platform, which can be seen as a long-term project, requires a great deal of time and money, and so does developing core security technology. Even after development succeeds, productization, proof-of-concept testing, and customer validation are needed, and it may take years before actual revenue is generated. The not-insignificant possibility of development failure also adds to the burden.

By contrast, adding new features to existing products can secure revenue relatively quickly, and expanding into fields where a market already exists can also bring revenue more quickly. The benefit of securing revenue quickly translates into easier quarterly and annual performance improvement and easier communication of results to investors.

For this reason, when the urgency of maintaining a listing and defending market cap increases, the likelihood of choosing projects that can be commercialized quickly rises, and preference for long-term core technologies weakens. Ultimately, even if total R&D spending is maintained, the content of technology investment can change, and corporate project selection may shift toward short-term commercialization rather than long-term research.

Companies facing a heavy burden of maintaining market cap may see a shortening of business strategy. Companies that need to maintain market cap above a certain level may, when they discover a growth opportunity, be more likely to prioritize financial metrics and the impact on stock prices.

In this process, overseas expansion, new businesses, and mergers and acquisitions (M&A) involve initial costs and uncertainty. As the possibility of weaker profitability and cash flow before results become visible is added to the mix, companies weigh the burden of such choices more heavily.

As a result, the likelihood of delayed decision-making may increase. Concerns that this could also lead to smaller business scale are being raised.

In particular, technology companies that need to take bold steps when the market opens may delay investment because of short-term market cap considerations. If investment is delayed, the risk of losing ground to competitors may also rise.

Meanwhile, strengthening market cap standards may also help prevent corporate distress. However, if it suppresses risk-taking by healthy companies, questions arise over how the growth model of innovative companies may change. (Image generated by AI)

Against this backdrop, the Financial Services Commission's policy direction is aimed at both swiftly removing distressed companies and smoothly listing innovative companies. The FSC has left room to consider the "KRW 30 billion standard" while maintaining the principle of delisting.

The FSC said the existing market cap and revenue standards were excessively low. Since there had been zero delistings under those two requirements over the past 10 years, the FSC judged that the exit of low-performing companies had been delayed. It also saw delayed exits as leading to inefficient capital allocation and weaker market trust.

Accordingly, the FSC expanded the scope of strengthened delisting requirements to include market cap, penny stocks, complete capital erosion, and disclosure violations, and it also pushed for shorter review procedures and shorter improvement periods. The FSC and the Korea Exchange estimated that around 150 KOSDAQ-listed companies could become delisting targets this year.

Financial regulators view market cap and stock price as the market's assessment of a company. When announcing delisting reform measures last February, Vice Chairman Kwon Dae-young of the Financial Services Commission said the market's assessment ultimately comes down to market cap and stock price, and he said low-market-cap, low-priced stocks should have been weeded out long ago, but action was delayed. He also said companies need to explain their plans to enhance corporate value to shareholders and must earn market evaluation through capital increases, restructuring, and changes to business plans.

As market volatility widened after the policy took effect and resistance from small and venture companies continued, financial authorities signaled room to review the next stage of standard increases. Vice Chairman Kwon said on August 12, while attending the "Great Debate on Regulatory Innovation for Small, Venture, and Startup Companies," that the recent rapid shifts in the market need to be considered and that the industry's burden regarding the KRW 30 billion market cap standard should also be taken into account. Accordingly, questions were raised about whether the KOSDAQ market cap standard increase scheduled for next January could be reconsidered in light of market conditions and corporate burden.

However, the FSC has not officially announced a deferral or adjustment of the KRW 30 billion standard, and said this does not mean a return to the already implemented KRW 20 billion standard. It also said this does not mean profitable companies or companies eligible for the technology-special listing regime will be excluded from application, and explained that the direction of swiftly removing distressed companies and the principle of delisting will be maintained. The financial authorities say the basic direction of stronger delisting measures will be kept, but there is room in the pace and method of the next-stage implementation.

The FSC is focusing support for innovative companies on the listing-entry stage, and it is pushing to introduce tailored technology-special listing systems for national core technology fields such as AI, space, and energy. The FSC plans to use field-specific technology advisers in listing reviews for technology companies and to expand the range of innovative technologies eligible for tailored technology-special listings.

The FSC's plan can be summed up as supporting listings at the entry stage and removing distressed companies through tougher standards after listing. The direction is to help innovative companies enter the market while applying stricter standards once they are listed.

However, smooth listing and survival after listing are separate issues. Even companies that enter the market through tailored technology evaluations may later see a decline in investor interest after listing, and their market cap may fall.

If investor interest declines and market cap falls, the burden of maintaining a listing can arise even before technology development results become visible. As a condition for achieving both swift delisting and support for innovative companies, review procedures after listing are needed to verify technology performance and business continuity in addition to technology evaluation at the listing stage.

The Korea Stock Investors Association urged financial authorities to reconsider the policy of strengthening market cap-based delisting requirements. Korea Stock Investors Association said that rather than the strengthened market cap standard itself, the way it is applied could harm healthy companies and investors, and it stated that the FSC has an obligation to prevent delisting of companies that are not distressed and to protect investors. It also raised the problem that companies harmed in the delisting process cannot file objections.

It also pointed out that by moving up the schedule for raising the market cap standard that the government had announced, the predictability for companies and investors was undermined. Accordingly, the Korea Stock Investors Association urged that a grace period be provided and that individual company reviews be introduced. It said the focus of investor-group demands is not opposition to removing distressed companies, but rather the establishment of procedures to distinguish low-market-cap companies from truly distressed ones. In the securities industry, there were views that rather than immediately restoring the system to its original state, the recent exceptional market conditions should be reflected in how it is applied.

Analyst Um Su-jin of Hana Securities said that in the recent market, where money has been concentrated in the semiconductor sector and extreme volatility has appeared, small and midsize stocks have recently been neglected, and that this is unrelated to earnings or fundamentals. She added that because stock prices are in a phase where they are more sensitive to market supply and demand than to earnings and technology, market cap standards can serve not only as a measure of corporate distress but also as an indicator of market interest, and even companies with the same financial condition and technology may face different listing risks depending on whether the market favors their industry.

However, Analyst Um Su-jin of Hana Securities took a cautious stance toward immediately reverting the system when the law has been in effect for only a month. Her view was that changing the system immediately after only a month of implementation could cause market confusion and undermine legal stability and credibility. She said she has no intention of arguing for a re-revision of the listing rules, and suggested that, for the time being, a grace period, case-by-case review, consistency with other regulations, and flexible consideration of the recent exceptional market conditions are needed.

The speaker said that as a way to screen out distressed companies, strengthening the initial listing review is preferable to tightening post-listing maintenance requirements, and that higher standards for new listings are needed. The explanation was that if solid, high-quality companies are screened and listed at the outset, the likelihood of later falling short of market cap, stock price, financial soundness, and disclosure standards decreases.

Financial authorities, investor groups, and the securities industry all shared the view that removing distressed companies is necessary. However, the accuracy with which market prices can identify actual distress, and the degree to which recovery opportunities should be given during periods of sharp market swings, were raised as points of contention.

Taken together, industry surveys, investor-group views, and securities-industry opinions converge on the idea that a realistic supplement is not abolishing the market cap standard or granting blanket exemptions by sector. Instead, the practical direction suggested was to establish a procedure for determining whether companies that fall below the market cap threshold are truly distressed and whether they can recover, and this procedure was described as a second-gate type of measure.

The first screening criterion for risky companies is market cap. Then, before a final delisting decision, additional review of financial condition, technological competitiveness, and business continuity is possible.

Financial review items include revenue growth, operating cash flow, whether there is capital erosion, debt ratio and liquidity, backlog, and new contracts. Technology review items include the share of R&D spending, whether specialized personnel are retained, patents, core technologies, performance in government R&D projects, product certifications, and progress in technology commercialization.

In particular, the criteria for technology-special listing companies center on whether the technology and business plans evaluated at the time of listing are actually being carried out. The direction is that whether to delist can be determined by looking at the continuity of technology and business according to such standards.

If R&D plans are being carried out and commercialization potential is maintained, a certain recovery period can be granted. On the other hand, if technology development has effectively stopped, core researchers have left, or the company has shifted to a business unrelated to the technology it had at the time of listing, protection is unnecessary, and it cannot be excluded simply because it is a technology company.

The direction for supplementary measures for companies in national strategic industries has been settled toward an additional review format rather than blanket exemption for the entire sector. The judgment criteria cannot be based on the name alone of AI or cybersecurity companies; instead, actual core technology, research personnel, contribution to the supply chain, and records of supplying national infrastructure should be verified.

There is also discussion of reviewing devices that reflect market conditions. Examples of conditions include a sharp drop in the KOSDAQ index by a certain amount and a steep decline in trading volume across small and midsize stocks, with extending the observation period for the market cap standard mentioned as a response. The idea is that if the cause is a broad market plunge rather than individual corporate mismanagement, companies should be given time for normal price formation to recover rather than being subjected to immediate delisting procedures.

However, the way the recovery period is applied should be adjusted according to the improvement plan and the degree of implementation rather than being applied equally to all companies. Conditions for granting an opportunity include normal progress in R&D, normal progress in commercialization, confirmation of new orders, and confirmation of an improved financial structure. On the other hand, the conditions for delisting are failure to carry out the plan and undermining capital-market discipline, and in such cases the principle is to remove the company swiftly.

For listed companies, market assessment and discipline are necessary. The responsibility of listed companies lies in explaining management performance and future strategy to shareholders, and it also includes efforts to properly value the company. However, the premise is that management failures and distress cannot be protected simply because a company is in a technology sector.

But it is pointed out that a low market cap cannot be equated with corporate distress. Market cap reflects not only corporate performance but also growth potential, stock-market trends, sector-specific supply and demand, investor sentiment, and liquidity. For that reason, some companies have seen their stock prices fall due to broad market movements, while others have actually halted development and lost business continuity.

The argument is that if these two types of companies are removed under the same standard, the purpose of cleaning up the market could be undermined. It is argued that removing distressed companies and protecting innovative companies are not in conflict, and that it is possible to screen risky companies based on market cap and stock price.

However, before a final delisting decision, it is suggested that financial condition, technological competitiveness, business continuity, and recovery potential should be reviewed further. In the end, a distinction between distress and undervaluation is necessary, and the point of the proposal is not to loosen standards but to make company evaluation mechanisms more precise.

In the AI era, the source of competitiveness for innovative companies lies in R&D that embraces uncertainty and in securing talent. The market's short-term appearance may make companies worry about stock prices before technology, but the long-term result of such a market is the weakening of the innovation base. In fostering innovative companies, the market's role is not simply to push more companies out quickly; its core function is to accurately distinguish which companies should remain and which should exit.

Source: IT DAILY · Lee Jae-young
Original: https://www.itdaily.kr/news/articleView.html?idxno=241168

References

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