The role of second-tier exchange in corporate valuation: Evidence from Korea

Abstract

Using data from Korea, we show that the second-tier exchange—also known as the entrepreneurial market—assigns higher valuations to growth-oriented (i.e., small yet intangibles-rich) companies despite their low profitability. In contrast, the main board favors companies with stable cashflows and regular payouts to shareholders. The difference between the two exchanges is most pronounced when companies are conditioned on their stage in life cycle as proxied by dividend payments. That is, the “growth” valuation is most evident in earlier-stage companies (i.e., dividend non-payers) of the second-tier exchange while the “cashflow” valuation is strongest in later-stage companies (i.e., dividend payers) of the main board. Further analysis supports the notion that the second-tier exchange distinguishes itself from—and thus complements—the main board by helping keep corporate growth opportunities in stock prices. Conversely, the results indicate that the main board fails to capitalize corporate growth options into firm value, as most companies therein have stable cashflows from unique assets and market position (i.e., economic rents) as the main value driver.