Analysis of corporate stock price trends before and after owner risk
Non-management owner ‘attitude’ risk has little impact
If the business is hit by a long-term boycott, the stock price will fall.
Expert “Business of stocks…not the owner, but the fundamentals of the company”
Shinsegae Vice Chairman Jeong Yong-jin’s remarks of ‘destruction’ are showing signs of spreading into a boycott of affiliates. The picture is a visual of a boycott campaign shared among netizens online.
Were we a nation that ate so much anchovies and beans? As the controversy over annihilation launched by Shinsegae Vice Chairman Jung Yong-jin spread to the political arena, shots of purchasing anchovy and soybeans continued one after another. Thanks to this, the Korean common noun ‘owner risk’ is also being talked about again.
So I found out. How does owner risk affect a company’s stock price? If it was an owner risk that ended in rumors, would it not have been an opportunity to buy stocks at the bottom?
① One week of controversy over destruction… Share price -3.8%
Shinsegae Group Vice Chairman Jung Yong-jin posted a series of ‘I hate the Communist Party’ since November 15 last year. Jung Yong-jin, Vice Chairman, Instagram capture
First, let’s take a look at Shinsegae’s share price. Vice-Chairman Jeong has already been raised in the rant once in November of last year. On November 15th, Vice Chairman Chung posted a picture of himself holding a red card wallet and Jackson Pizza Box on Instagram, saying, “Please do not misunderstand the feeling of a communist party.” #I hate the Communist Party with the hashtag.
Vice Chairman Chung continued his remarks with a similar purpose two days later, saying, “I don’t like beans.” On the 24th, he posted an article about the killing of North Korean residents, emphasizing that he “has no communist party.” Let’s call this period the ‘anti-communist first phase’ for convenience. The stock price of Shinsegae in the first period fell from 242,000 won (based on the closing price on the 15th) to 229,000 won on the 24th, except for one day on the 19th. However, after that, it rises slightly and recovers the previous level on December 7th (245,500 won).
Vice Chairman Chung’s remarks moved to an ideological debate on the 5th of this month, ‘I will survive to the end and destroy it!!!’ The slogan was removed for violating Instagram guidelines. On the 8th, presidential candidates Yoon Seok-yeol, former floor leader Na Kyung-won, and former National Assembly Vice Chairman Jeong Gap-yun, powerful figures of the people’s power ran to E-Mart to buy anchovies and beans to respond. Let’s call this period the ‘Second Destruction’.
Shinsegae stock, which won 250,000 won on January 7, traded at 233,000 won, down 6.8% on the 10th, after the destruction certification shot was issued. Shinsegae short selling, which is usually hundreds of cases, reached 38,000 that day. Shinsegae shares rebounded for three days in a row, then fell on the 14th and closed at 242,000 won. This is a decline of 3.8% in one week, which is higher than that of Hyundai Department Store (-0.4%) and Lotte Shopping (+2.1%) during the same period, but LG Household & Health Care (-11.8%) and Amorepacific suffered from similar issues such as duty-free shops and the Chinese market. (-5.3%) was better than that. On the 7th and 14th, the KOSPI fell 1.12%.
② Owner ‘attitude’ risk, stock price impact in the short term
Donors Dong-han Yun (left), Chairman of Kolmar Korea Holdings, and Young-hoon Lee, Director of the National Museum of Korea, look at Suwol Gwaneumdo, the donor, at the ‘Koryo Buddhist painting Suwol Gwaneumdo donation ceremony and public event’ held at the Education Center of the National Museum of Korea in Yongsan-gu, Seoul on October 17, 2016. Hankook Ilbo file photo
owner risk. The encyclopedia states that ‘the arbitrariness of the owner is detrimental to corporate management’. An official from a securities company explains, “It is different from the CEO risk that exists overseas as the owner is strongly influenced by the board of directors.” It is difficult to tie the decline in Kakao stock price as an owner risk.
On the Korea Stock Exchange, we looked for share price trends of other companies that experienced owner risk. When risk of owner ‘attitude’ that has nothing to do with corporate structure, such as abuse or misrepresentation, occurred, the stock price was not affected much in the long run.
A representative example is Kolmar Korea, a cosmetics customer development and production company. On August 6-7, 2019, former Chairman Yoon Dong-han opened up a far-right YouTuber video explaining Korea’s response to Japan’s export restrictions in a monthly inquiry. In the video, a YouTuber caused controversy by saying, “Abe is a great leader even if he didn’t hit Moon Jae-in in the face with his fist.” The company tried to explain, but as it spread to a boycott of the cosmetic companies that were supplied with it, on the 11th, four days later, Yoon decided to step down from management.
Let’s look at the stock price. It shows a steady decline, falling from 49,800 won on August 6 to 48,150 won (-3.31%) the next day. It hit a low of 39,250 won on October 4 and recovered on January 13 (53,000 won) of the following year, five months after Yoon’s resignation. Former Chairman Yoon returned to an unregistered executive position on November 15 last year, but the stock price has fallen more than when he resigned. Due to the prolonged novel coronavirus infection (COVID-19), sales channels such as exports and delivery to duty-free shops were blocked, and on November 15, it recorded 42,550 won. COVID-19 has had a more decisive impact on stock prices than owner risk.
③ Owner risk butterfly effect is key
Cho Hyun-min (right), CEO of Hanjin, returned home from overseas at dawn on December 15, 2016, when the water cup abuse scandal spread. Cho Hyun-ah (left) with former Korean Air vice president in 2014. yunhap news
The Hanjin family also has a short history of owner risk. At first, it caused controversy due to the owner’s travels, but it has developed into a ‘different level’ risk as it leads to a butterfly effect such as prosecution investigations and sanctions by the Ministry of Land, Infrastructure and Transport.
It was December 8, 2014, when Cho Hyun-ah, former vice president of Korean Air, became known about the in-flight disturbance in Korea. The investigation began on the 11th, and the Ministry of Land, Infrastructure and Transport filed a complaint with the prosecution on the 16th. Korean Air’s share price peaked at 37,300 won on December 3rd at 50,000 won on the 11th and then goes downhill. By the end of February of the following year, it will go up and down around 45,000 won. However, at that time, the aviation industry was enjoying a boom due to the drop in international oil prices. This is in contrast to the Asiana stock price, which ‘flew’ from 5,820 won (December 8, 2014) to 9,180 won (February 24, 2015) during the same period. In other words, I couldn’t row the boat when the water came in.
On April 12, 2018, Cho Hyun-min, president of Hanjin, was exposed to the abuse of a water cup. After that, President Cho’s violation of the Aviation Act was confirmed, and the butterfly effect of the Ministry of Land, Infrastructure and Transport reviewing the cancellation of Jin Air’s aircraft license works once again. On August 17th, it ended with sanctions against new flights instead of license revocation, but on the 20th, a tax investigation by the National Tax Service will be conducted again.
Jin Air’s stock price, which went public in December 2017, steadily climbed to 32,550 won on April 11, the day before the report on the water cup abuse. Since then, it has steadily declined, recording the lowest since listing at 21,600 won on August 14, before the announcement of the Ministry of Land, Infrastructure and Transport. It was March 31, 2020, when the Ministry of Land, Infrastructure and Transport’s Jin Air sanctions were unexpectedly lifted. It closed at 11,100 won, up 14.79% from the previous day and double from March 23rd. Businesses also have something to say. The essence of the stock price downward is not the owner risk, but the bleeding competition for low-cost airlines, Corona 19. There is a point. The share price of Jeju Air, which was 47,950 won on April 11, 2018, also fluctuated and fell to 39,450 won on August 16, 2018. If you look at the rate of decline, it is comparable to Jin Air.
④ If the fundamentals are affected by a long-term boycott, the stock price will fall.
On May 4, last year, Namyang Dairy Chairman Hong Won-sik announced his resignation as chairman while making a public apology at the auditorium on the 3rd floor of the headquarters in Nonhyeon-dong, Seoul. Hankook Ilbo file photo
The problem is different if the butterfly effect of owner risk shakes the fundamentals of the company. A typical example is Namyang Dairy. Namyang Dairy, which has become a symbol of domestic consumer boycotts due to slanderous comments from competitors, drug incidents by the chairman’s nephew, and sales of dealerships, has plummeted by more than 60% over the past nine years.
In the early 2010s, Namyang Dairy was a golden week. On April 30, 2013, right before the push-out controversy, Namyang Dairy’s stock price rose to 1165,000 won. On January 25, the Fair Trade Commission accepted the push of Namyang Dairy and a related rally was held, but the effect was minimal. However, after the transcript of the last words of the dealership was released on May 4, it plummeted 8.59% in 7 days and 15% on the 13th in a week, falling from the 1 million won level. On June 27, there was a stir when it was argued that a female employee of Namyang Dairy would switch to a contract job and cut wages and not give various allowances when married. The stock price in 2015-16 showed a steady decline to around 750,000 won and in 2019 to around 600,000 won.
On April 1, 2019, Chairman Hwang’s niece Hana Hwang was involved in a drug crime case. On May 6, 2020, under the direction of the chairman, he wrote a slanderous comment to Maeil Dairy, a competitor, and became controversial. The stock, which was 309,500 won on May 6, fell to 278,000 won on June 15.
In April and May of last year, the Bulgarian crisis hit. On April 13, when it was announced that Vulgaris had the effect of suppressing the activation of the coronavirus, it rose 8.57% to 380,000 won in one day, but the next day, the Ministry of Food and Drug Safety announced the position, and the stock price plunged out of control. As the owner family decided to sell their shares, the stock price rose to the price limit. However, the new board of directors faces difficulties and falls again. As of the closing price on January 14, 2022, the stock price is 403,500 won. That’s only 34.6% of what it was in 2013.
The fact that owner risk is reflected in the share price is a ‘case-by-case’ case, even if you look at Namyang Dairy’s 8-year history. For example, Hwang Hana’s drug reports had no effect. The stock price, which was 611,000 won on April 1, 2019, when Hwang’s report was published, has continued to trade at 600,000 won after that.
Rather, it seems more reasonable to interpret that the steady boycott caused by owner risk and the resulting decline in sales and operating profit had an impact on the stock price. Namyang Dairy’s sales fell 30.5% from 1.365 trillion won in 2012 before the disclosure of the push-out to 948.9 billion won in 2020. During the same period, operating profit fell from a surplus of 63.7 billion won to a loss of 77.1 billion won, and net profit fell from a surplus of 61 billion won to a loss of 53.5 billion won.
⑤ Investment should look at the industrial structure and corporate value, not the owner
Shinsegae share price trend over the past three months. Korea Exchange Capture
Conclusion. Owner risk has short-term implications for businesses. There are not many full-scale studies on long-term effects because there are many ‘qualitative parts’.
As a result of analysis of stock price changes in 8 companies and 31 listed affiliates of 31 listed affiliates that suffered from owner abuse by Hyeon-il Lim, associate research fellow at the Korea Corporate Governance Service, “Negative abnormal cumulative return (-2.951%) in a large number of sampled companies. This has been observed” (‘Effect of Owner Risk on Corporate Value’, 2017). Specifically, “a significant abnormal cumulative return is not observed until the 5th trading day after the occurrence of the event, but the stock price declines after the 5th trading day, and a significant share price decline is observed after the 15th trading day.” Lee Chang-min, a professor of business administration at Hanyang University, also said, “Compared to the 1% drop in the KOSPI index on the 10th, the fact that the Shinsegae stock price fell by more than 5% must have been a trigger for owner risk. I think I must have gone crazy,” he said.
Investors seem to have different opinions as to whether the annihilation controversy will be just a short-term event or how far the butterfly effect will go. There is also a domestic study that shows that companies with high owner risk tend to reduce tax avoidance because they are more likely to be subject to tax audits (Juwoon et al., ‘Effect of owner risk on corporate tax avoidance’ 2020). In this case, the company’s financial statements will be sounder through phone fraud. Koh Tae-bong, head of the research center at Hi Investment & Securities, said, “Companies experiencing owner risk are BtoC companies that deal with general consumers.
If so, should owner risk be viewed as an opportunity to buy stocks at the bottom of the market, if they do not lead to boycotts, administrative sanctions, or investigations by the prosecution? Ji-ho Yoon, head of the research center at eBest Investment & Securities, advised, “When investing, look at the fundamentals (management indicators) of a company.” “The recent decline in Shinsegae stock price is hard to see as a buy (opportunity) at a low point (controversy over the collapse) because the impact of COVID-19 anxiety factors such as duty-free shop operation and industrial changes such as the online market is greater.” Go Tae-bong, head of the center, added similar advice. Whether the owner’s social respect and stock price fluctuations are ‘separate’. “When the owner of Hyundai Motor Company announced a plan to restructure the circular shareholding structure, saying that he would pay 1 trillion won in taxes, the stock price fell,” he said.
Yoon-Joo Lee reporter misslee@hankookilbo.com
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