Estimating the Value of Absolute Power: Evidence from Judiciary Decision Events on Controlling Shareholders in Large Business Groups

Abstract

This paper estimates the impact of judicial decisions, mainly the prosecution and court sentencing of controlling shareholders’ corporate crime, embezzlement, and breach of fiduciary duty, on the market value of a firm. The indictment or imprisonment of controlling shareholders in Korean large business groups, chaebols, provides an experimental setting for analyzing the absence of the real boss. Our main findings are as follows. First, judicial decisions relating to controlling shareholders generally do not have a significant group-wide effect on the value of a firm. Second, the portion of firms that receive a positive impact and a negative impact from having a controlling shareholder held in custody is almost equivalent (46% versus 54%, respectively). In situations where there is a court appeal, the portion of firms that receive a positive impact decreases to 38%, while the portion of firms that receive a negative impact increases to 62%. Third, the effect of court decisions on affiliated firms within the same business group is asymmetric. For instance, such decisions have a positive effect on affiliates where a controlling shareholder holds a large proportion of the shares; however, they have a negative impact on affiliates thought to be more likely to grow at faster rates in the future. For this reason, sentencing of the controlling shareholder itself induces value transference between the different affiliated firms in a given company group.