Long-term evolution of the firm value and behavior of business groups: Korean chaebols between weak premium, strong discount, and strong premium

Abstract

This paper analyzes the long-term evolution of the costs and benefits associated with chaebols or diversified business groups in Korea. Chaebol-affiliated firms in Korea have experienced dramatic changes in their costs and benefits along three time periods (1984–1988, 1990–1995, and 2001–2005). They did not suffer a value loss relative to non-affiliated firms in the 1980s, but did so in the 1990s. In the post-crisis period, however, they began to show value gains. To identify the causes of these changes, we examine if chaebol firms prioritize profit stability over profit maximization, overinvest in low-return businesses, cross-subsidize the low-performing affiliates of their group, and possess greater debt capacity, consequently enjoying lower tax burdens. We discover that in the 1980s, chaebol firms generally enjoyed various perks, such as tax breaks, but shied away from excessive investment activities. In the 1990s, their performance worsened because of substantial over-investment, despite several advantages. However, after massive restructuring and sorting out following the 1997 Asian financial crisis, chaebols emerged as very profitable firms correcting over-investment despite the absence of tax perks and debt-carrying advantages.