S. Korea's Parent-Subsidiary Listing Rate 224 Times U.S. Level, Fueling Korea Discount

South Korea's rate of parent-subsidiary listings is far higher than major developed markets, contributing to the country's ongoing undervaluation of equities, known as the "Korea discount." As of the end of last year, South Korea's rate stood at 11.2%, compared to the U.S.'s 0.05% and Japan's 4.0%. This high rate is largely due to conglomerates raising capital through subsidiary listings while controlling shareholders maintain control. This practice can create conflicts of interest between controlling and minority shareholders.

A study by the Korea Capital Market Institute found that parent-company valuations often decline following subsidiary listings, as investors can gain direct exposure to the subsidiary, reducing the appeal of investing in the parent company indirectly. Examples include LG Chem's battery business spin-off and LG Energy Solution listing, which resulted in a sharp drop in LG Chem's shares. Similarly, SK Group's SK Bioscience and SK IE Technology listings have kept parent company shares below their pre-listing levels.

The proposed Nasdaq listing of Solidigm, an indirect subsidiary of SK hynix, has become a new issue. While the Financial Supervisory Service and Korea Exchange have made it clear that the overseas listing would still be subject to South Korea's regulations, critics argue that the current rules lack enforcement teeth. Unlike domestic listings, overseas listings are not subject to clear compliance deadlines, and penalties for violations are capped at just 1 billion won.

SK hynix, which plans significant investments in semiconductor projects, could benefit from raising external capital through Solidigm. However, lawmakers and corporate governance advocates warn that this could harm shareholder value.