“Market Cap Over Innovation”: In the AI Era, Will Companies Still Be Judged by Numbers?

In the AI era, a company's competitiveness can no longer be explained by revenue and profit alone. Developing new technologies and securing specialized talent require long-term, large-scale investment, and it is uncertain whether R&D results will actually translate into sales. A company may hold the technology even when the market is not yet mature, and even if revenue rises, profits may still fail to materialize because of front-loaded investment.

Even so, capital markets are becoming more simplistic in how they evaluate companies. The government and financial regulators are pushing to quickly remove troubled listed companies and boost trust in the KOSDAQ market, and the tighter listing-maintenance rules include market capitalization and sales. As a result, an evaluation structure that is separate from technology, talent, and contribution to the national industry is being strengthened.

Under this structure, even companies with strong technology face sanction risks if their stock price and external indicators fall short of the standards. In particular, if a stock price decline causes a company to miss the market-capitalization threshold, it may face the risk of being designated as a monitored issue. If the stock price decline also causes the company to fail the market-capitalization requirement, delisting risk can follow as well.

There is broad agreement on the principle that troubled companies should be removed from the market. The issue, however, is whether companies with low market capitalization can be treated the same as troubled companies. In a situation where stock prices reflect factors outside a company's control — such as a sluggish stock market, a concentration in large-cap stocks, and weak interest in a sector — there are concerns that using market capitalization as the key criterion for survival could force innovative small and mid-sized firms out of the market.

Computerworld conducted a survey in late July through late August targeting 18 KOSDAQ-listed information security and IT companies, and the survey confirmed these concerns. Among respondents, 66.7% expected stricter market-capitalization standards to have a negative impact, and 94.4% said using market capitalization and stock price as the key criteria for maintaining a listing was inappropriate as a sole standard or that the standard itself was inappropriate.

As the burden of maintaining a listing ripples through corporate management, concern has grown that R&D investment could be dampened. 55.6% of respondents said they were worried that R&D investment would be significantly or somewhat reduced.

A system for expelling troubled companies requires firms to defend short-term performance and stock prices. Such pressure to defend short-term performance and stock prices could reduce room for future technology investment.

The government's reason for strengthening the delisting regime is clear. To reduce the widening damage to investors caused by troubled companies with little chance of recovery lingering in the market and to curb the continued absorption of capital market funds by zombie companies, the government is pushing to tighten delisting rules.

The Financial Services Commission initially planned to raise the KOSDAQ market-capitalization threshold for listed companies to KRW 4 billion in 2025, KRW 15 billion in 2026, KRW 20 billion in 2027, and KRW 30 billion in 2028. Later, the commission accelerated the reform and shortened the cycle for raising the market-capitalization threshold from annual to semiannual.

The KOSDAQ market-capitalization threshold was raised to KRW 15 billion in January this year and then raised again to KRW 20 billion in July of the same year, with a further increase to KRW 30 billion planned from January 2027. As a result, the threshold will change from KRW 4 billion to KRW 30 billion within a year, a 7.5-fold increase. This strengthened standard is being applied not just as advance notice but in connection with actual delisting procedures.

According to Korea Exchange data, as of August 12, 27 KOSDAQ-listed companies had triggered grounds for designation as monitored issues due to stock price or market-capitalization shortfalls. Of these, 23 had stock prices below KRW 1,000 and 6 had market capitalization below KRW 20 billion, with 2 meeting both conditions. Excluding 6 companies already designated as monitored issues for other reasons, 21 were newly added to the monitored-issue list. These designated companies are then given 90 trading days, and if they fail to recover the relevant stock-price or market-capitalization threshold for 45 consecutive trading days, they become final delisting targets. As the tightened delisting standards began to operate in practice, the process has entered a stage that affects companies' listing status.

There is a view that stronger standards are needed because leaving troubled companies untouched is not acceptable. If companies that have lost growth potential remain in the market, they may repeatedly issue paid-in capital increases and convertible bonds, which could in turn widen investor damage. Companies involved in unfair trading, accounting fraud, or substantive suspension of business need to be removed in a timely manner, and the purpose of such removals is to strengthen trust in the capital market.

At the same time, it is also noted that the factors determining market capitalization are largely nonfinancial. Market capitalization is influenced by interest rates, exchange rates, overall stock market trends, sector preferences, institutional investor flows, the number of shares in circulation, trading volume, investor expectations, and investor sentiment. Accordingly, even among companies with similar performance and technology, differences in corporate value can emerge, and those differences may also depend on industry classification and whether a company is included in a market's hot theme.

It is particularly pointed out that smaller KOSDAQ companies have higher stock-price volatility, and that even trading by a small number of investors can amplify that volatility. Companies with low trading volume face a greater chance of a sharp stock-price drop when buying interest weakens, and such a drop can drive investor exits. In the end, there is a risk of a vicious cycle between investor exits and falling stock prices, raising debate over whether it is appropriate to directly link market price and a company's continued existence.

In the survey, negative views dominated when it came to the impact of tighter market-capitalization standards. 27.8% of respondents said the impact would be very negative, and 38.9% said it would be somewhat negative. The combined negative response was 66.7%.

By contrast, 27.8% said there would be no particular impact, and only 5.6% expected a positive effect. Positive expectations for tighter market-capitalization standards thus remained in the minority.

This perception translated into a broader view that concerns over the burden of maintaining a listing and rising market uncertainty outweighed the possibility of revaluing stronger companies following the expulsion of troubled ones. Regarding the burden of maintaining a listing, 16.7% said the risk was already significant, 11.1% said the risk could grow in the short term, and 38.9% said the burden could increase in the medium to long term.

The combined share of respondents who saw the burden as current or likely in the future was 66.7%, while 33.3% said the current risk was not significant. This was interpreted as reflecting concerns that even companies far from the current threshold could face real pressure if the market-capitalization threshold is raised to KRW 30 billion and stock prices fall.

Although risk levels vary by company, tighter market-capitalization standards were found to have the common effect of introducing a new variable into management decisions. The root of corporate dissatisfaction with market-capitalization standards was the limits of a company's ability to control its stock price.

A decline in stock price can go beyond investor evaluation and lead to a threat to a company's listing status. As a result, more aspects of corporate management become subject to oversight, and revenue, profit, technology development, and the stock price formed every day are all seen as management targets.

Respondent companies said that even companies not currently subject to the market-capitalization standard could be affected if short-term market-capitalization logic were strengthened. They also raised concerns about reduced investment in long-term core technology that does not quickly convert into sales and a slowdown in the expansion of specialized talent, while also pointing to possible lasting effects in cybersecurity, where preemptive research is essential.

In multiple responses, the biggest factors affecting recent stock prices and market capitalization were weakening investor sentiment across the stock market and a concentration in large-cap stocks, cited by 83.3% of respondents. This was followed by low interest in the information security sector and insufficient trading volume at 55.6%.

By contrast, company performance such as revenue and operating profit was cited by 27.8%, while R&D results and technological competitiveness were cited by only 5.6%. The survey confirmed the perception that stock market sentiment and the bias toward large-cap stocks have a greater impact on stock prices and market capitalization than internal corporate performance.

In the long run, company performance and technology strength were cited as factors affecting stock prices. However, respondent companies judged that in the short term, market capitalization for small and mid-sized technology companies is influenced more by market supply-demand conditions and investor interest than by internal performance. They also said this gap could widen further in the AI era.

AI and security technologies have a characteristic time lag from R&D to commercialization and revenue generation. It was also noted that even after developing a new AI model or core security technology, there is no guarantee the market will immediately recognize its value and reflect it in the stock price.

Information security products must be developed before new cyberthreats emerge. The threats to be addressed include zero-day vulnerabilities, ransomware, supply chain attacks, and attacks that exploit generative AI. Meeting these threats requires advance research that does not immediately lead to revenue, and obtaining and renewing security certifications also requires time and money.

For that reason, if market-capitalization standards are directly tied to maintaining a listing, a company's incentives may shift toward prioritizing its current stock price over future profits. This raises the possibility that market evaluation could determine a company's fate before long-term R&D results become visible.

When asked about using market capitalization and stock price as the key yardstick for listing maintenance, most companies expressed negative views on using them as sole standards. The survey question concerned whether market capitalization and stock price were appropriate as the key criteria for maintaining a listing. Among respondents, 61.1% said they could be used as reference points but were inappropriate as sole standards, 5.6% said they were generally inappropriate, and 27.8% said they were very inappropriate.

As a result, the combined share of companies opposing or deeming a sole market-capitalization standard inappropriate stood at 94.4%. The most common response was that market capitalization could be used as a reference. By contrast, 1 company said it was generally appropriate, and none said it was very appropriate.

That said, the companies were not rejecting market assessment itself. They acknowledged market capitalization as a reference indicator, but opposed a system in which stock price and market capitalization alone, without additional review of financial soundness, business continuity, and technological competitiveness, would lead to delisting.

Companies explained that market capitalization is heavily affected not only by a company's financial condition and technology strength but also by external factors such as market sentiment, liquidity, and sector preferences. One company official said it is unreasonable to decide whether to delist a company based only on market capitalization without considering the company's growth potential and stability. Another said information security companies tend to have seasonal sales concentrated in the second half of the year, and that because they are small, institutional investors pay them little attention, so even strong companies are not guaranteed to see stock-price gains.

For that reason, companies are saying that evaluating a company based only on market capitalization is inappropriate. Since market capitalization can move independently of a company's fundamentals due to external factors and sector characteristics, the argument is that using it as a single standard to decide delisting or company evaluation is unfair.

There is also a counterargument. Some say a certain market-capitalization threshold is necessary, pointing out that very small companies lack trading volume and liquidity, make normal price discovery difficult, and are highly susceptible to stock-price swings even with small amounts of capital. There is also the argument that the limited funds and management capacity of the listed market should be concentrated on companies with high growth potential, and this view is considered persuasive.

The core of the debate is not whether the market-capitalization threshold should be abolished. The key issue is whether immediate expulsion procedures should be applied to companies that fail to meet the threshold. Whether actual signs of trouble, technological competitiveness, and recovery potential should be reviewed separately is also being discussed.

A multiple-response survey was conducted on how companies would respond managerially if tighter market-capitalization standards continue. 55.6% said they would choose stock buybacks and dividends, among other measures to stabilize stock prices and return value to shareholders. Another 55.6% said they would expand IR, pursue M&A, or restructure the business portfolio.

22.2% said they would pursue short-term performance improvement centered on revenue and operating profit. Another 22.2% said they had no separate response plan or chose other options. By contrast, no company directly selected "R&D investment, new business, or workforce adjustment."

R&D and personnel are seen as core competitiveness for information security companies. It was suggested that companies may find it difficult to publicly state that they will cut R&D or personnel. At the same time, companies expressed their commitment to maintaining R&D investment.

In a separate question asking about the impact of listing maintenance and stock-price management burdens on R&D investment, more than half of respondents acknowledged a possible reduction in R&D spending. 16.7% said R&D investment could be significantly reduced, and 38.9% said it could be somewhat reduced, for a combined 55.6% acknowledging the possibility of a decline.

By contrast, 27.8% said there would be no particular impact, 5.6% saw a positive possibility for management efficiency and stronger R&D performance management, and 11.1% said it was hard to judge. As a result, when asked separately about the impact of listing maintenance and stock-price management burdens on R&D, more than half saw a possible reduction in R&D investment.

However, companies said their first response would be stock-price management rather than direct cuts to R&D. Given limited corporate funds, spending on stock buybacks, dividends, IR expansion, accounting and legal advice, or M&A reviews would reduce resources available for R&D and new businesses.

Companies explained that when concerns over monitored-issue designation become prominent or pressure to meet current standards grows, they begin to consider defensive measures such as stock buybacks or shareholder returns to respond to stock-price volatility. One company official said the firm could consider defensive measures such as stock buybacks to address stock-price volatility, and that such measures could conflict with funding for R&D and new-business investment. Another said that if stock buybacks and shareholder-return plans are reviewed to meet current standards, real R&D investment could be affected, and that higher spending on investor relations would be unavoidable.

This trend is being cited as a hidden cost of tighter market-capitalization standards. As companies move to defensive responses, additional costs are incurred and the allocation of investment funds may change. As a result, some companies could see concrete effects such as reduced hiring, scaled-back R&D plans, and delays in launching new businesses.

In some companies, even if there is no immediate cut to the R&D budget, the timing of spending may be delayed. The possibility was also raised that companies may prioritize businesses that can be commercialized in the short term over longer-term projects. Impacts on hiring, R&D, and new-business schedules, as well as a shift toward businesses with short-term performance potential over long-term investment, were cited as side effects of tighter market-capitalization standards.

Although the system is ostensibly aimed at expelling troubled companies, it has also been pointed out that inside firms, decisions may be made to redirect funds from future investment to current stock-price management. The irony was raised that a system intended to prevent distress could instead weaken a company's long-term growth foundation.

In the AI and information security industries, there is a time lag between technology development and market evaluation. Next-generation security solutions can take 2 to 3 years or more from development start to commercialization, showing a mismatch between a long technology-development cycle and a short market-evaluation cycle.

In the process, products must go through various certification and verification procedures before they can be supplied to the public or financial markets. Companies must bear R&D and labor costs during the certification and verification period, and there may be no revenue during that time.

By contrast, stock prices in the market fluctuate daily. As a result, market capitalization can fall due to a sluggish stock market or waning interest in a sector regardless of whether technology development is proceeding normally.

In that case, a company may face the burden of maintaining its listing not because development failed, but because its performance has not yet been reflected in the market. In other words, the mismatch between the pace of technology development and market evaluation can increase corporate pressure.

Workforce management shows the same structure. Information security personnel cannot be immediately deployed to product development or security operations right after hiring, and time is needed for them to gain an understanding of the company's technology and customer environment and to build practical capabilities. For that reason, reducing new hires may provide short-term cost savings, but in the long run it could weaken technological competitiveness and response capabilities several years down the road.

When corporate decision-making becomes short-term oriented, investment priorities are likely to shift from long-term innovation to short-term performance and proven technologies. The likelihood of prioritizing improvements to existing product features over core technology and long-term platform development grows, and so does the tendency to choose businesses that can generate revenue quickly. It has also been pointed out that following technologies already proven in the market may become more advantageous for maintaining a listing than undertaking high-risk innovation research.

This trend creates a gap between the type of company needed in the AI era and the choices that are favorable for maintaining a listing. The companies needed in the AI era are not those that simply repeat existing technologies, but those that accept uncertainty and develop new technologies. Yet the more survival criteria are centered on short-term market capitalization, the harder it becomes to choose innovation with a high chance of failure.

That said, companies are not asking for financial performance to be excluded from evaluation criteria. When asked what should be given top priority in listing-maintenance decisions besides market capitalization, "sales growth and financial soundness" ranked first at 61.1%, followed by "technological competitiveness such as patents and core technologies" at 55.6%. Next came "contribution to protecting national infrastructure and public value" at 27.8%, "R&D investment and the share of specialized talent" at 16.7%, and "growth potential such as exports, employment, and order backlog" at 16.7%.

The results mean that companies are not supporting the protection of troubled firms based on technology alone. Corporate evaluation should be based on sales and financial soundness as a foundation, combined with technological competitiveness, R&D, public value, and growth potential. Market capitalization is a momentary market assessment.

Indicators cited as reflecting a company's actual management condition include sales growth, cash flow, debt ratio, and whether capital has been eroded. Patents, core technologies, and R&D personnel were cited as materials for judging future competitiveness, while order backlog, new contracts, and overseas expansion results were cited as materials for judging growth potential. Order backlog, new contracts, and overseas expansion results may not be reflected in the current period's income statement.

Information security companies are different from consumer goods companies. Because their main customers are public institutions and financial companies, budget execution and project orders tend to be concentrated in the second half of the year. In addition, even after a contract is signed, revenue is recognized only after implementation and inspection are complete, creating a recognition lag between orders and sales.

It was noted that looking only at quarterly results or market capitalization at a specific point in time can lead to undervaluing a company's worth, and that financial conditions can fluctuate over the course of a year. Accordingly, the view was presented that company condition should be assessed using annual results, a 2-year moving average, and order backlog together.

Against this backdrop, a survey was conducted on what should be reviewed first as a supplement to delisting standards. 55.6% of participating companies chose a plan to evaluate technology, R&D, and growth potential at the same time as market capitalization, while 22.2% chose to postpone implementation until market conditions improve.

In addition, 16.7% of participating companies chose a separate review process for companies eligible for technology-special listing or strategic industries, while 11.1% chose an approach linked to market conditions such as the KOSDAQ index. No company said the tightened standards should be applied as is without separate remedies.

What companies are asking for is not the abolition of market-capitalization standards, but an additional evaluation process to determine actual distress. Respondents proposed evaluating financial soundness as the foundation and also assessing technological competitiveness, R&D, order backlog, and growth potential, while believing that the application period should be flexibly adjusted if the overall market drops sharply. They also said companies listed under the technology-special listing system need a separate process to recheck whether the technology and business plan assessed at the time of listing are being carried out.

The debate is shifting away from whether market capitalization should be excluded as a listing-maintenance criterion and toward how accurately market prices can identify companies that are truly troubled. Companies say market capitalization can be used as a first screening tool for risky firms, but they want financial checks, technology checks, and business continuity checks before final delisting.

Source: IT DAILY · Lee Jae-young
Original: https://www.itdaily.kr/news/articleView.html?idxno=241148

References

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