One in Five KOSPI Companies Have “Bad Stock” Traits — Low Free Float Raises Governance and Investment Risk
One in Five KOSPI Companies Have “Bad Stock” Traits — Low Free Float Raises Governance and Investment Risk
※ 22% of KOSPI-listed firms have a free-float ratio below 35%, a level that would trigger delisting in Japan’s prime market.
Low-float stocks allow dominant shareholders to maintain control while benefiting from public listing status.
Foreign investors and global index providers exclude or underweight such companies, limiting liquidity and valuation.
Experts warn that low free float erodes shareholder rights and makes Korea’s capital market less credible globally. 😅
A recent study revealed that nearly a quarter of Korea’s KOSPI-listed corporations trade with limited free float, a structural weakness commonly described abroad as a “bad stock” characteristic.
In global markets, companies with too few circulating shares often suffer price manipulation, excessive control by founding families, and reduced investor confidence. Yet in Korea, such firms still enjoy fund-raising privileges and tax advantages associated with public listings.
According to market data provider FnGuide (Oct 19), as of the 15th, there were 169 non-financial, common-stock KOSPI companies whose free-float ratio fell below 35%. This equates to roughly 22% of all listings—a share that would be unacceptable in other major exchanges.
By comparison, Japan’s Tokyo Stock Exchange Prime Market enforces a minimum 35% free-float rule; failure to meet it can result in delisting. If the threshold were lowered to 25%, still 65 KOSPI companies (8.4%) would fall short.
Notable cases include Taekwang Industrial (21.1%) and SNT Holdings (24.2%), both criticized for shareholder-unfriendly treasury-stock deals. Analysts argue that such structures allow management to retain near-total control while treating ordinary investors as outsiders.
🌍 Global Standards Highlight the Gap
Other exchanges apply strict liquidity requirements:
- Tokyo Stock Exchange raised its minimum floating-market-cap threshold from 1 billion to 10 billion yen in 2022, while new Standard and Growth markets can delist firms with less than 25% float.
- The New York Stock Exchange (NYSE) and NASDAQ demand sufficient public float and market capitalization for continued listing.
- Hong Kong Exchange (HKEX) also mandates at least 25% free float.
Major index providers share this stance. MSCI excludes firms below 15% float, and FTSE Russell sets its inclusion range between 10% and 25%. Consequently, global institutional funds avoid illiquid Korean names, constraining price growth even during bull markets.
“Large foreign asset managers place heavy emphasis on the volume of stock available for trading,” noted Lee Nam-woo, chair of the Korea Corporate Governance Forum. “They prefer liquid companies where prices move freely rather than stocks dominated by a controlling bloc.”
🧩 Governance and Market Function Concerns
Academic researchers warn that low-float firms behave more like private companies than public ones. With most shares locked by insiders, minority shareholders cannot exercise voting rights effectively, and corporate accountability weakens.
Lee Sang-ho, researcher at the Korea Capital Market Institute, stated:
“When a majority of shares are inaccessible, shareholder pressure disappears. Such companies cease to function as genuine listed entities. The market must establish filtering criteria for extremely low-float cases.”
Reforms similar to Japan’s 2022 market restructuring could be a model. TSE’s tightening of liquidity and cross-shareholding calculations led to higher turnover, better governance, and stronger valuations—outcomes Korea hopes to replicate.
📊 U.S. & Korean Stock Market Impact
🇺🇸 U.S. Market
- Positive: Strengthens case for high-liquidity, high-governance stocks globally; funds may continue concentrating on U.S. mega-caps with strong transparency.
- Negative: Highlights emerging-market governance gaps, discouraging allocation to markets perceived as opaque.
- Sector watch: U.S. financials and ETF managers may benefit as investors favor regulated exchanges and passive products.
🇰🇷 Korean Market
- Short-term risk: Outflows from illiquid conglomerate subsidiaries; potential re-rating lower for companies under 25–30% float.
- Long-term opportunity: Possible policy reforms could lift Korea’s governance premium, expanding MSCI/FTSE weighting.
- Winners: Firms with transparent shareholder structures and active investor-relations programs.
- Losers: Family-controlled groups with entrenched cross-holdings and limited public float.
💡 Investor Checklist
- Check the free-float ratio before investing; under 30% often implies liquidity and governance risk.
- Avoid thinly traded stocks—price moves can be manipulated by small volume.
- Focus on index-eligible firms that meet MSCI/FTSE float standards.
- Watch for regulatory signals—Korea Exchange or FSC may strengthen float criteria.
- Prioritize shareholder-friendly policies (buyback transparency, voting accessibility).
❓ Frequently Asked Questions (FAQ)
Q1. What exactly is “free float”?
A. The portion of shares actually circulating among public investors, excluding insider, treasury, or cross-held shares.
Q2. Why do low-float stocks concern investors?
A. With few shares available, prices swing easily, liquidity dries up, and controlling owners can dominate votes.
Q3. Could stricter float rules hurt small firms?
A. Initially yes, but over time stronger liquidity standards attract foreign funds and stabilize valuations.
Q4. How does this issue affect foreign investment in Korea?
A. Global funds track float-adjusted indices; too many ineligible companies mean KOSPI’s global weighting stays low.
Q5. Which sectors might benefit from reform?
A. Financials, tech, and consumer names with large free float and transparent governance may see valuation upgrades.