A recent Meritz Securities report suggests that the Korean stock market is at a major inflection point, driven by fundamental changes in law and policy.
The most significant development is the recent revision of the Commercial Act. This new law mandates that companies must cancel their own shares (treasury shares) that they buy back, typically within a year. Previously, companies could hold these shares indefinitely, offering little direct benefit to shareholders. Now, cancellation is the new norm. This is a big deal because it directly boosts the value of the remaining shares. For instance, simply canceling 3% of a company's stock automatically increases its earnings per share (EPS) by over 3%.
In response, companies are already taking action. Immediately after the law passed, major corporations like KT&G announced plans to cancel huge portions of their treasury stock. This swift reaction signals to the market that this isn't a one-time event, but a fundamental, long-term shift in how Korean companies manage their capital.
This legal change is not happening in a vacuum. It is the capstone of the government's broader 'Corporate Value-up Program,' which has been encouraging companies to improve shareholder returns. We have seen the launch of a new 'Korea Value-up Index' and related ETFs that have already attracted significant investment, proving strong investor demand for this theme. Furthermore, new tax incentives are making it more attractive for investors to receive dividends.
So, how does this all lead to a market re-rating—a sustained increase in valuation multiples? It works in two ways. First, as mentioned, share cancellations mechanically increase EPS. Second, and more importantly, when companies consistently return capital to shareholders through predictable dividends and buybacks, it reduces their cost of equity. Investors perceive the company as less risky and are willing to pay a higher price for its future earnings. This is a path well-trodden by markets like Japan and the U.S., which saw significant re-ratings after similar reforms.
What we are witnessing is a powerful alignment of law, policy, and market demand. This trifecta is pushing Korean companies toward a new era of disciplined capital allocation with a clear focus on maximizing shareholder value.
- Treasury Shares: Shares that a company has repurchased from the open market. Canceling them reduces the total number of shares outstanding, increasing the ownership stake and earnings per share for remaining shareholders.
- Re-rating: A change in the market's perception of a company or an entire stock market, leading to a sustained adjustment in its valuation multiple (like the Price-to-Earnings ratio).
- Cost of Equity: The return a company is expected to provide to its equity investors. A lower cost of equity, often resulting from perceived lower risk and stable returns, can lead to a higher stock valuation.