Another Reason You Shouldn’t Invest in the Korean Stock Market: Samsung Electronics’ 10 Trillion Won Share Buyback

After repeatedly hitting new 52-week lows and even breaking below the 50,000 won level, Samsung Electronics’ share price suddenly jumped more than 7% in a single day last Friday. A technical rebound was expected once it reached the “40,000 won Samsung” level, but for the largest company on the KOSPI by market capitalization to rise over 7% in the absence of any clear catalyst is no easy feat.

The mystery behind this out-of-the-blue 7% rebound was cleared up by disclosures released after the market closed. The company announced a plan to buy back 10 trillion won worth of its own shares over the next year, with 3 trillion won to be repurchased and then cancelled within three months.

In the U.S. market, it is quite common for management to decide on share buybacks and cancellations when they judge that the stock is significantly undervalued relative to its intrinsic value, or when there will be new share issuance to grant RSUs as employee compensation. So the mere fact that Samsung Electronics announced a 10 trillion won share buyback plan in itself is not the problem.

For the share price of Korea’s largest company, with a market capitalization of over 300 trillion won, to rise more than 7% even before a 10 trillion won buyback plan was disclosed, is something I believe could not have happened without that information leaking in advance.

There is of course no hard evidence, but the circumstantial evidence seems more than sufficient to warrant an investigation into possible violations of the Capital Markets Act. Historically, however, Korea’s Capital Markets Act has been enforced selectively in favor of chaebol families and the forces that feed off them, so I do not expect much. In the United States, the SEC (Securities and Exchange Commission) would likely have launched an investigation long ago.

The fact that the share price decline began to directly affect the Samsung owner family, and then a massive share buyback plan was announced, can also be seen as problematic. Lee Jae-yong’s mother, Hong Ra-hee, took out loans using her Samsung Electronics shares as collateral, and the continued slide in the share price appears to have triggered a request for additional collateral—in simple terms, a margin call.

As of the beginning of this year, Hong Ra-hee held about a 1.45% stake in Samsung Electronics, the highest among individual shareholders, but with that level of ownership it is difficult for her to exercise direct managerial control over the company. Chairman Lee Jae-yong effectively uses Samsung C&T as a holding company and controls Samsung Electronics through Samsung Life Insurance. This complex ownership structure arose partly due to various legal constraints, but in practice it often sacrifices the interests of shareholders other than the owner family.

In this context, the share buyback looks like a strategy to achieve both share price stabilization and relief of the owner family’s financial pressure. The real question, however, is whether this decision was made for the benefit of the owner family, or as a fair measure for all shareholders. Coupled with suspicions of information leakage just before the stock price jumped, this move could further undermine trust in the capital market as a whole.

Samsung Electronics’ share buyback announcement may have a positive short-term impact on the stock price, but this episode has once again exposed the issues of information asymmetry and corporate governance in Korea’s capital markets. To restore trust in the market, fair disclosure and robust law enforcement are essential.

If strict regulations like those in the United States were applied, this case would likely have been the subject of an intensive SEC investigation. In reality, however, law enforcement against chaebol in Korea tends to be relatively lenient. This is one of the reasons it is so difficult to earn the trust of minority shareholders in the capital market. In the end, for people like us, the answer is the United States.