Hybrid securities and firm performance: evidence from Korean small and medium-sized firms

Purpose Using a sample of 204 issuers from 2016 to 2020, this study investigates the short- and long-run stock performance for small- and medium-sized enterprises (SMEs) following hybrid securities issuances, including those of bonds with warrants, convertible bonds, and exchangeable bonds, in the KOSDAQ market. Design/methodology/approach This study employs an event study methodology and buy-and-hold abnormal returns to assess stock performance around the announcement date (short-run) and over extended periods (long-run). This analysis distinguishes between different types of hybrid securities to provide a comprehensive view of their impact on stock performance. Findings Firms experience significantly positive cumulative abnormal returns around the announcement date, suggesting a positive investor response. However, the long-run analysis reveals marked underperformance, especially for firms issuing bonds with warrants and exchangeable bonds, with significant declines over the two- and three-year periods. Clearly, managers may exploit overvaluations in hybrid securities markets, resulting in long-run stock underperformance. Firm-specific characteristics, such as growth opportunities, financial investor involvement, and corporate governance, also play a role in influencing stock performance. Originality/value This study contributes to the literature by examining hybrid securities in the KOSDAQ, a market characterized by its focus on SMEs in an emerging economy. Unlike extant research that primarily focuses on developed markets, this study uniquely incorporates exchangeable bonds, a financing instrument increasingly adopted by Korean firms. By offering detailed insights into their impact on stock performance and firm behavior, this study bridges critical gaps in the literature by providing practical implications for investors and policymakers in emerging markets.