This paper examines whether new equity may be issued to recapitalize existing assets in financially distressed firms. Using a sample of 3,184 follow-on primary common stock issues offered by Korean publicly traded firms from 2000–2013, we find that more than one-third of the equities are issued to creditors in direct exchange for debt. We also determine that equity issuers are in severe financial distress prior to the issue and are more likely to experience a subsequent change in control. The proceeds are used more to replace existing debt than to increase R&D. These findings suggest that equity issues in emerging markets may be used primarily to recapitalize existing assets through debt restructuring or control transfers rather than to finance growth options.
We would like to thank Chan-Young Eom, Pinghsun Huang, Shinae Kang, Changmin Lee, Chien-Ling Lo, Huiyan Qui, and other seminar participants at 2009 KASBA Conference (Yongpyong), 2009 Korea Finance Association Annual Meetings (Seoul), 2010 China International conference in Finance (CICF) (Beijing), 2010 FMA Asian Conference (Singapore), 2016 Malaysian Finance Association Annual Conference (Melaka), 2017 FMA Annual Meeting (2017), 2018 New Zealand Finance Meeting (Queenstown), 2019 TFA International Conference (Taiwan), and Korea University for helpful comments. Euna Cho, Yongseok Kim, Chan Lim, Jieun Lim, Jiho Sohn, Tae Jun Yoon, and Hyunbok Wee provided excellent research assistance. This study was supported by the Institute of Management Research at Seoul National University and Institute of Finance and Banking of Seoul National University. Wang appreciates research supported by the new faculty research fund of Ajou University.We would like to thank Chan-Young Eom, Pinghsun Huang, Shinae Kang, Changmin Lee, Chien-Ling Lo, Huiyan Qui, and other seminar participants at 2009 KASBA Conference (Yongpyong), 2009 Korea Finance Association Annual Meetings (Seoul), 2010 China International conference in Finance (CICF) (Beijing), 2010 FMA Asian Conference (Singapore), 2016 Malaysian Finance Association Annual Conference (Melaka), 2017 FMA Annual Meeting (2017), 2018 New Zealand Finance Meeting (Queenstown), 2019 TFA International Conference (Taiwan), and Korea University for helpful comments. Euna Cho, Yongseok Kim, Chan Lim, Jieun Lim, Jiho Sohn, Tae Jun Yoon, and Hyunbok Wee provided excellent research assistance. This study was supported by the Institute of Management Research at Seoul National University and Institute of Finance and Banking of Seoul National University. Wang appreciates research supported by the new faculty research fund of Ajou University.
