External Financing and Stock Returns: Korean Evidence

This study examines whether the external financing anomaly exists in an emerging-market setting. Using data on Korean listed firms from 1994 to 2023, we find that firms with higher net external financing subsequently earn significantly lower stock returns, consistent with behavioral misvaluation and market-timing explanations. A hedge portfolio long in net repurchasers and short in net issuers delivers an average annual return of about 12 percent. Decomposing financing flows show that both equity and debt issuance predict lower future returns, and further separating debt into bonds and loans reveals a stronger negative return association for bond-financed firms, consistent with greater sentiment sensitivity in market-based financing. We also document subsequent declines in operating performance, indicating that external financing aligns with temporary overvaluation rather than growth opportunities. Overall, our findings extend evidence on the external financing anomaly to an emerging market and provide further support for the behavioral interpretation of corporate financing decisions.