Short selling, low capital input hurt stocks included into Kosdaq 150 index

2023.05.25 12:45:02 | 2023.05.25 13:55:51

[Photo by MK DB]이미지 확대

[Photo by MK DB]

Companies newly included in the Kosdaq 150 index are experiencing a detrimental effect on their stock prices due to diminishing demand from index-tracking funds coupled with negative short-selling activities and the limited availability of investment funds, according to a study conducted by the Korea Exchange (KRX).

Contrary to historical patterns, the addition of stocks to the index no longer guarantees a positive impact where abundant passive funds led to stock price surges.

The KRX study examined the stock performance of 62 companies newly included in the Kosdaq 150 over a three-month period following their inclusion. Surprisingly, the results indicated that 43 of these companies, or 69 percent, experienced a decline in stock prices compared with their previous levels.

May 2021 marks the reopening of short selling for Kospi 200 and Kosdaq 150 stocks. New stocks are added to the Kosdaq 150 twice a year.

For the stock returns from the past four regular index changes spanning 2021 and 2022, it was found that the average returns of newly included stocks in the Kosdaq 150 underperformed those of the broader Kosdaq market.

The study compared the three-month performance after inclusion for the first and second half of 2021, as well as the first half of 2022. Additionally, it examined the stock returns from the adjustment made in the second half of the previous year until May 23 of this year.

The disappointing effect of Kosdaq 150 inclusion can be attributed to the dwindling size of funds tracking the index due to the departure of several investors from the Kosdaq market. The net asset value of Kosdaq 150 exchange-traded funds (ETFs), which aim to mirror the performance of the Kosdaq 150 index, was down by about 11 percent to 1.78 trillion won ($1.34 billion) as of May 23 from 2.01 trillion won a year ago.

Moreover, the paradoxical phenomenon of index inclusion becoming perceived as a negative development has emerged since the resumption of short selling for Kospi 200 and Kosdaq 150 stocks.

Given the smaller market capitalization of Kosdaq-listed companies, heightened short selling can trigger significant volatility in their stock prices. The average daily trading volume of short selling for Kosdaq 150 stocks climbed from 99.6 billion won in 2021 to 132 billion won in 2022 to 232.4 billion won as of May 23.

“Many of the newly included companies in the index experienced substantial stock price increases before their inclusion, and this makes them attractive targets for short selling,” said Nam A-ran, an analyst at DAOL Investment & Securities Co.

Some companies are considering a migration to the Kospi market, where they can avoid being targeted by short sellers in the Kosdaq market.

However, some say that the issue will be resolved once short selling rules go back to normal, arguing that the current problem stems from the selective allowance of short selling for specific stocks, creating a market distortion, which differs from historical practices.

By Kang Min-woo and Minu Kim

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