Does the SME Exchange Properly Function as a “Growth Market”? A Look Through its Correlation with Private-Firm Growth

Abstract

< Abstract > This paper evaluates whether a stock exchange targeted specifically at SMEs, namely, the SME exchange, functions as a "growth market" by capitalizing industry growth opportunities into stock prices. To this end, we examine the correlation between the SME exchange prices-aggregated up to the industry level-and private-firm growth. That is, we use the growth of private firms in an industry as a proxy for industry growth options that the SME exchange prices need to embody. Using data from Korea whose SME exchange is one of the largest in the world, we find that the SME exchange prices are positively correlated with the growth of private firms, especially when they are small in size, they belong to a growing industry, or their growth is funded by equity. In the same regression, the main board stock prices are correlated with the liability-funded growth of large-size private firms in a mature industry. Taken together, our results suggest that the SME exchange plays a positive and complementary role in the economy by embodying the type of industry growth opportunities that are not readily represented by the main board stock prices.Does the SME Exchange Properly Function as a "Growth Market"? 4682) The main board in Korea is called KOSPI. To avoid confusion, we use the term "main board" to refer to KOSPI, and continue to use the term "SME exchange" for KOSDAQ.3) See, for example, WFE (2016) for the positive aspects of the Korean SME exchange. In Section 2, we also provide the exchange's institutional details.

The Role of Second‐Tier Exchange in Corporate Valuation: Evidence from Korea*

“…It is correct to say that KOSDAQ has been successful. As documented by Choi and Lee (2019), the exchange has been cited as one of the most successful second‐tier exchanges in the world. For instance, the World Federation of Exchanges (2016) notes that the listings in KOSDAQ are second only to TSX Venture of Canada.…”

“…We find Korea’s second‐tier exchange to be a perfect embodiment of this controversy. As pointed out by Choi and Lee (2019), the country’s second‐tier exchange is praised by outsiders as the example of a well‐functioning entrepreneurial market but at the same time it is regularly caricatured by local pundits as a place filled with sheer greed and outsized volatility. By reporting the results from Korea’s second‐tier exchange, we hope to help both academics and policy‐makers better understand the pros and cons surrounding the second‐tier exchanges in their respective countries.…”