Treasury Share Cancellation: EPS vs. Incentive Showdown

Intensified Discussions on Revising the Commercial Act

Discussions have been intensifying in the National Assembly regarding revising the Commercial Act to mandate the cancellation of treasury shares. This has attracted significant attention from both the stock market and business communities. While there are expectations that mandatory cancellation could increase earnings per share (EPS) and stimulate stock price growth, concerns are also being raised about potential long-term consequences.

Some argue that this policy might reduce incentives for companies to acquire treasury shares, which could ultimately decrease shareholder returns. The debate highlights a complex balance between short-term gains and long-term strategic considerations.

Surge in Exchangeable Bonds Issuance

In response to the potential changes, companies have been rushing to issue exchangeable bonds (EBs) using treasury shares before the mandate takes effect. In September alone, 38 companies—12 on the KOSPI and 26 on the KOSDAQ—issued EBs with treasury shares as the exchange target, marking a monthly record high.

Exchangeable bonds are a financial instrument where companies use treasury shares as collateral, allowing investors to convert them into shares under certain conditions. For companies, this method offers the advantage of raising funds without directly disposing of treasury shares. However, this trend has not been without controversy.

Shareholder Backlash Against EB Issuance

Shareholder backlash against the issuance of EBs has been substantial. For example, when Taekwang Industrial pursued EB issuance using treasury shares, Truston Asset Management, its second-largest shareholder, applied for a court injunction to block the move, although it was rejected. Amid growing controversy, Taekwang Industrial temporarily suspended the issuance and plans to reconsider it at a board meeting this month.

Similarly, KCC announced a plan to issue EBs with 9.9% of its treasury shares as the exchange target but withdrew it a week later due to strong opposition from minority shareholders. These cases illustrate the growing tension between corporate strategies and shareholder interests.

Treasury Share Cancellation: A Catalyst for Shareholder Value?

According to Daishin Securities, as of the 26th of last month, listed companies on the KOSPI held a total of 84.338 trillion Korean won in treasury shares, accounting for 3.1% of the market’s total capitalization. KOSDAQ-listed companies held 9.169 trillion Korean won in treasury shares, representing 2.1% of their market’s total capitalization.

Lee Kyung-yeon, a researcher at Daishin Securities, explained, “If all treasury shares were canceled, KOSPI EPS would improve by approximately 3.2%, and KOSDAQ EPS by 2.1%. Even if the cancellation rate is lowered to 90–95%, KOSPI could see a 2.9% improvement, and KOSDAQ around 2%.”

Positive Impact on Stock Prices

In addition to EPS growth, treasury share acquisitions have a positive impact on stock prices. Stocks that announced treasury share purchases outperformed the market by 1–3.8 percentage points in the short term (2–5 trading days) and by 11.2–19.66 percentage points over six months, and 16.4–47.91 percentage points over a year.

For instance, SK Square’s stock price, which was in the high 70,000 Korean won range at the beginning of this year, surpassed 200,000 Korean won after the company announced a 1.1 trillion Korean won treasury share buyback and cancellation plan in March. The researcher noted, “Announcements of treasury share cancellations have a strong signaling effect, driving stock price increases. Beyond mere EPS improvement, they can act as a catalyst for enhancing shareholder value and re-rating valuations.”

Business Community Concerns

The business community expresses concerns that mandating treasury share cancellation could be excessive regulation, potentially weakening acquisition incentives. In a recent report, the Korea Chamber of Commerce and Industry pointed out, “If cancellation is mandatory, companies may lose incentives to acquire treasury shares, and the effect of repeated purchases on stock price support could disappear.”

Treasury shares have historically been used not only for cancellation but also for fundraising, restructuring, and employee compensation. However, mandatory cancellation would narrow these uses, making companies more hesitant to buy back shares. Shin Hyun-han, a professor at Yonsei University’s School of Business, stated, “Focusing solely on short-term stock price gains from cancellation could lead to the loss of long-term benefits of treasury share acquisitions, which may contradict the goal of enhancing shareholder value.”