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The number of "zombie" companies, considered one of the causes of the so-called "Korea discount," has yet to decline, although financial authorities have implemented various measures to delist them from the stock market.

A zombie company is defined as a business with an interest coverage ratio below one for three consecutive years. This ratio is calculated by dividing operating profit by interest expense and serves as an indicator of how well a company generates earnings relative to its debt obligations. These underperforming companies struggle to pay loan interest with their operating profits and survive primarily through loan extensions from financial institutions or government support.

According to the Federation of Korean Industries on Thursday, one in five publicly traded companies in Korea is classified as a zombie company.

The federation analyzed listed companies in Korea and five major economies — the United States, Japan, Germany, Britain and France — and found that, as of the third quarter of last year, 19.5 percent of Korean companies — 440 out of 2,260 — were zombie firms. This places Korea second behind the U.S. at 25 percent, followed by France at 19.4 percent, Germany at 18.7 percent, Britain at 13.6 percent and Japan at 4 percent.

The proportion of zombie companies in Korea increased by 12.3 percentage points compared to 2016, marking the second-largest rise after the U.S., which saw an increase of 15.8 percentage points.

The financial authorities have long emphasized the need for the swift delisting of underperforming companies, as their presence in the capital market can hinder healthy firms' ability to secure funding.

In May last year, the Korea Exchange pointed out that delisting requirements were far too lenient compared to listing requirements, resulting in almost no companies being removed from the market. This, in turn, allowed low-market-cap, low-liquidity stocks to remain, disrupting the market.

Korea Exchange CEO Jeong Eun-bo at the time vowed to tighten delisting criteria to address this issue, announcing plans to shorten the trading suspension period for delisting.

The Financial Supervisory Service (FSS) also promised in November to proactively conduct accounting audits on companies showing signs of becoming zombie firms and take swift action if violations are found.

In January, the Financial Services Commission and other authorities announced that, from the second half of this year, any company listed on the KOSPI or the Kosdaq that receives a limited, disqualified or rejected audit opinion for two consecutive years will be delisted.

Financial Supervisory Service Gov. Lee Bok-hyun speaks during an open forum on revitalizing the Korean stock market at the Korea Exchange building in Seoul, Thursday. Yonhap

However, the latest data suggests these measures have had little impact on the market.

Amid the sluggish performance of the domestic stock market, the trend of retail investors escaping the Korean stock market and concentrating on U.S. stocks intensified in 2024.

According to data submitted by the FSS and nine securities firms to Rep. Kim Hyun-jung of the main opposition Democratic Party of Korea, domestic stock trading by these investors last year fell by 13 percent, whereas overseas stock trading increased by 39 percent.

FSS Gov. Lee Bok-hyun expressed concerns over the growing exodus of young investors from the domestic market, warning that it threatens the market's growth potential, during an open forum on revitalizing the Korean stock market, also on Thursday.

He stated that the financial watchdog would collaborate with relevant government agencies to develop concrete measures to expand the foundation for long-term investment demand.

"There needs to be a broader culture that recognizes and practices the value of long-term investing," Lee said. "Ensuring that capital remains in our financial markets over the long term is essential for creating a virtuous cycle of market stability and wealth accumulation for investors."