Simplifying Business Group Structures: Value and Governance Implications for Korean Chaebols

Abstract

We examine Korean business groups' transition from circular-shareholding structures to (relatively simple) pyramidal-shareholding structures between 2011 and 2018. The transition did not impact chaebol families' control or incentive conflicts at firms that belonged to circular-ownership loops, yet their value declined. Group-structure simplification accompanied increased earnings responsiveness in group firms. Non-loop group firms experienced a value increase (decline) if they had little (significant) agency issues that were difficult to identify under opaque circular-shareholding structures. By enabling investors to update their priors about the severity of agency issues and their consequences across group firms, ownership transparency can increase or lower firm valuation.