Business Groups In Korea Research Articles

The role of financial affiliates in tax avoidance by business groups: Evidence from Korea

AbstractThis study examines whether financial affiliates within a nonfinancial business group perform certain roles and functions in tax avoidance by other nonfinancial affiliates or the group as a whole. Financial institutions have tax‐planning expertise and knowledge and thus may assist other affiliates of the same group in avoiding taxes. In addition, regulatory loopholes leave scope for tax avoidance involving financial affiliates. Using 10,659 firm‐year observations from 866 nonfinancial listed firms affiliated with business groups in Korea over the period 2001–2019, I find that firms belonging to nonfinancial groups with financial affiliates exhibit higher levels of tax avoidance than those belonging to nonfinancial groups without financial affiliates. The same result is observed at the group‐level tax avoidance as well as the firm‐level tax avoidance. In addition, I provide evidence that KFTC‐designated business groups subject to tighter regulation engage more in tax avoidance by utilizing financial affiliates in the blind spots of regulation and oversight, and that related‐party transactions (i.e., intragroup transactions) are used as avenues for financial affiliates to help other affiliates in tax avoidance. This study is one of the first empirical studies to shed light on the role of financial affiliates of nonfinancial groups in tax planning.

기업집단 국제화 문헌연구

Purpose – Business groups in Korea and Japan have different national environments. It will be possible to examine how their corporate governance affects performance and finance, and how it affects economic development and innovation through literature research related to the field of international management. Design/Methodology/Approach – This study reviewed domestic and foreign papers related to keiretsu and chaebol from 2001 to 2020. As a result, we selected and analyzed 39 foreign journals and 6 domestic journals, a total of 45 papers. Findings – It was found that interest in the impact of each factor on corporate performance, such as internationalization, resources and capabilities, business group attributes, and corporate governance, was high. It was found that research related to Asian business groups, especially chaebol and keiretsu, is so closely related to corporate performance that it cannot be considered separately. However, domestic journals only focused on chaebol research, and there was no research on keiretsu. Research Implications – It is expected that the roles and discussions of business groups will be expanded by reviewing existing literature on Korea’s chaebol and Japan's keiretsu among business groups, and reviewing comparative literature under different corporate governance structures. In addition, it will serve as an opportunity to identify the direction of academic research through a literature review of business groups in the two countries.

Can Business Groups Survive Institutional Advancements? Examining the Role of Internal Market for Non-Tradable, Intangible Assets

Business groups are observed everywhere except in the U.S. and U.K.; their global presence is widely acknowledged. The most successful explanation for this preponderance has been based on the relative efficiency of business groups’ internal market vis-à-vis the external market conventionally observed in underdeveloped or emerging economies. Unsurprisingly, this view cannot explain why business groups also prosper in advanced economies where their internal market is thought to no longer match efficient external markets. This study addresses this contradiction by drawing attention to non-tradable, intangible assets and putting forward an institution-free, micro-level explanation. Specifically, we reason that the external market for organizational capabilities is bound to be missing regardless of institutional advancements and economic development due to human beings’ innate cognitive limits and information and behavioral uncertainties, while business groups’ internal markets may overcome these limits via their distinctive organizing mechanism underpinned by group identity, solidarity, mutual trust, shared organizational architecture, and enhanced communicability. In other words, business groups can outperform the external market in coordinating and facilitating exchanges of non-tradable assets and organizational capabilities in particular that are becoming increasingly crucial for successful competition. Using panel data of large business groups in Korea during the periods between 2003 and 2016, we confirm that affiliation with business groups and accessing their internal market enhances technological capability. Thus, this study extends our understanding of business groups beyond the institution-based explanation.

Product market competition and business groups in Korea

This study examines the effect of changes in product market competition on the stock returns of business groups, using the KORUS FTA as an exogenous shock and quasi-natural experiment. Based on a difference-in-difference-in-differences analysis we find that business groups have lower returns than independent firms when competition increases. Our results support the creative self-destruction hypothesis for stock returns and the entry threat channels related to business groups and product market competition. Thus, we identify an important link between product market competition, business groups, and stock returns.

Risk sharing and export performance with firm heterogeneity

AbstractWe investigate how market uncertainty affects the export performance of a firm through financial frictions. We first extend Melitz's (2003) heterogeneous firm trade model by incorporating demand shocks, linking the demand uncertainties to the financing costs of firms. In this extension, the default probability is endogenously determined by a firm's productivity and demand uncertainty. Hence, firms with higher productivity or lower market uncertainty are offered lower interest rates and thus show better export performance. As an application, we also show that a risk‐sharing mechanism, that pools default risk for a certain group of firms, lowers the default risk. This mechanism allows banks to charge lower interest rates to the member firms and therefore ultimately improves their export performance in both extensive and intensive margins. We find a real‐world example of such a mechanism from business groups in Korea. Using Korean firm‐level data, we show that the more diversified the business group, the greater the likelihood that its member firms export and the bigger their export revenues. We also show that our results are robust to alternative explanations for Korean business groups’ export competitiveness.

Business Group Dominance and Capital Allocation Externalities: Evidence from Korean Chaebols

This study investigates how dominant business groups affect investment decisions of other standalone firms in the economy. Using intra-group equity transactions within the top 40 largest business groups in Korea, this study finds that high levels of internal capital allocation within the groups exert a negative influence on investments of standalone firms that require external capital. Due to financial market imperfections associated with low investor protections, business groups prefer internal investment rather than outside investment. However, when internal capital allocation is prevalent in the economy, lots of capital is trapped inside business groups and available capital in external markets becomes scarce. Standalone firms outside business groups have difficulties raising external finance and thus reduce investment. The negative influence on investments of business group dominance is particularly pronounced for private standalone firms and the firms that hold fewer tangible assets. Findings in this study suggest a negative externality that business groups impose on other standalone firms: the bias toward internal investment makes it harder for good projects outside business groups to obtain capital.

Regulatory Disclosure of Large Business Groups in Korea

Purpose: This paper examines the theoretical grounds for the disclosure of the Korea Fair Trade Commission. Three central measures of the disclosure are scrutinized: The interconnected status of affiliate companies, the important matters of private affiliates, and the large internal transactions. Contemplating on three measures, respectively, we review the rationale and derive policy implications. Research design, data, and methodology: Collecting the data of violation rates and remedial measures, we analyze the intensity of the disclosure enforcement. These statistics are critically reviewed by the economic literature of mandatory disclosure. Results: Statistics evince that the Korea Fair Trade Commission has enforced the regulatory disclosure quite successfully. Violation rates of the disclosure has declined from the outset. It demonstrates that the Korea Fair Trade Commission has enforced those measures satisfactorily for about a decade. But we cannot ascertain empirically whether the regulatory disclosures are socially and economically beneficial. To evaluate the effect of the regulatory disclosures precisely, we need a further empirical investigation. Conclusions: Despite the lack of policy evaluation, this study suggests complementary measures for current disclosures. First, disclosure of executive compensation in privately held subsidiaries must be introduced. Second, the controlling shareholder/manager should be responsible for information disclosure on foreign subsidiaries.

Tunneling Through Group Trademarks

This study documents how group trademarks, comprising the business group’s name and logo, can be used for the benefit of controlling families at the expense of outside minority shareholders. Using a sample of business groups in Korea, we find evidence consistent with this hypothesis. First, firms are more likely to be licensor firms if the controlling families hold higher cash flow rights. Second, firms are more likely to be licensee firms and subject to higher royalty rates if their sales volume is larger and the controlling family’s cash flow rights in such firms are further below those in the licensor firms. Third, dividend payouts of licensee firms are negatively associated with their royalty payments if the controlling family’s cash flow rights in such firms are far below those in the licensor firms. Lastly, these results show up more strongly in pure holding company groups, where the licensor firms have no business operation of their own and, thus, rely more heavily on trademark revenue.

Compensation structure of family business groups

We examine executive compensation structures with a focus on family business groups in Korea. Our results show that Korean family business groups provide 60% more total compensation to CEOs who are family members than to professional CEOs. This excessive increment is not based on performance-contingent payments, but on fixed payments. Our propensity score matching and difference-in-differences analyses robustly support these results. Further, we find that operation of internal capital markets, CEO talents, CEO stock ownership, and family board membership do not explain the excessive compensation of family CEOs in family business groups. The evidence indicates rent extraction through executive compensation in family business groups.

Group-Affiliated Analysts’ Strategic Forecasts During a Year: Evidence from Korea

ABSTRACTIn examining the family-controlled business groups in Korea, prior literature shows that group-affiliated analysts’ forecasts are optimistically biased. This article investigates whether the group-affiliated analysts strategically time the level of accuracy and bias in their forecasts for the same group-affiliated firms due to the change in information asymmetry in the market. The results show that the group-affiliated analysts issue more accurate and less optimistic earnings forecasts for the affiliated firms when the level of information asymmetry is low; particularly, in April, which is right after annual earnings announcements.

Business Groups in Korea, 1987~2016

Business Groups in Korea, 1987~2016

Adjustment Costs and Investment Efficiency of Business Groups in Korea

This paper investigates investment efficiency of business groups in Korea. Business groups can centralize knowledge and group resources, which reduces the cost of entering a new industry. In view of Tobin’s q, the adjustment costs of investment of business group firms are lower than those of independent firms. The empirical results show that the adjustment costs of business group firms are lower than those of independent firms, and that the output-capital ratio of business group firms is greater than that of independent firms. The results suggest that business group firms contribute to lowering the adjustment cost and to increasing investment, which, in turn, contribute to the growth of the Korean economy.

Comparing the productivity impacts of knowledge spillovers from network and arm’s length industries: findings from business groups in Korea

Given the increasing significance of knowledge spillovers in innovation, this study investigates and compares knowledge spillovers from arm’s length firms in the industries (market) with those from sister firms in the same business group (network). By dividing the knowledge pool into pools within and outside a sector to which a firm belongs, we reexamine the ongoing debate on the relative size of the intra- versus inter-sector spillovers, and address a new question on the relative size of spillovers from networks compared with that from arm’s length industries. We find that, although both intra- and inter-sector spillovers are significant, no evidence proves the dominance of either type of spillover, whether the spillover is from industries or from networks. More importantly, we find that spillovers from networks are greater than those from industries, regardless of whether the comparison was made between intra- and intra-, inter- and inter-, intra- and inter-, or inter- and intra-sector spillovers. Results imply that knowledge spillover is not automatic, and knowledge can be transferred better through direct interaction, which is more prevalent within network organizations, such as business groups.

Separation of Cash Flow and Voting Rights and Firm Performance in Large Family Business Groups in Korea

AbstractManuscript TypeEmpiricalResearch Question/IssueThis study examines how separation of cash flow and voting rights influences performance of firms affiliated with large family business groups. Complementing the dominant view grounded in agency theory, we suggest that the separation of cash flow and voting rights has positive influence on firm performance in the context of large family business groups.Research Findings/InsightsUsing the data from the large family business groups in Korea, or Chaebols, between 2003 and 2010, we found that the separation is positively associated with firm accounting performance, but not with market performance. We also found that the effect of the separation is moderated by analyst coverage, R&D expenditure, and sales share in the business group.Theoretical/Academic ImplicationsThis study reveals that in the large family business groups, the context in which the separation most frequently occurs, the separation not only induces the controlling minority shareholders to pursue private benefits of control but also accompanies financing benefits from active use of the internal capital market. In addition, this study notes the importance of addressing the endogeneity in the analysis of the relation between ownership structure and performance.Practitioner/Policy ImplicationsThis study offers insights to policy makers planning to enforce/revoke the regulation on the separation of cash flow and voting rights in the pursuit of corporate governance reform especially in countries with poor shareholder protection.

Stock return commonality within business groups: Fundamentals or sentiment?

We examine stock return comovement within business groups in Korea. Based on all publicly traded stocks from 1980 to 2009, we document that stocks of companies belonging to the same business group co-move with each other more than do stocks in the same industry. The within-group correlation in excess of the within-industry correlation has become more pronounced over time, especially following the 1997–98 Asian crisis. The increase in correlation appears to be driven more by non-fundamental factors such as correlated trading, rather than fundamental factors such as related-party transactions. Our study adds to the literature by showing that non-fundamental stock return correlation – i.e., categorization or habitat-driven stock comovement – exists even at the business-group level.

The association between related-party transactions and control–ownership wedge: Evidence from Korea

In this study, we examine whether related party transactions (RPT) are used as a mechanism for tunneling among firms belonging to large business groups in Korea (chaebols). Using 982 firm-year data of publicly traded firms in Korea, we find that the control–ownership wedge is positively associated with the magnitude of RPTs. RPTs increase as voting rights increase, while RPTs decrease as cash flow rights increase. The control–ownership wedge is more closely related to RPTs among the top 5 chaebol firms where the agency conflicts between the controlling shareholders and the minority shareholders are more severe than in non-top 5 chaebol firms. While the significant positive association between the control–ownership wedge and RPTs holds for both operating and non-operating RPTs, we find that non-top 5 chaebols use only non-operating RPTs whereas the top 5 firms use both operating and non-operating RPTs. Finally, we find that RPTs of Korean chaebol firms, on average, reduce firm value, but this value destruction is observed only when the control–ownership wedge is high and is more pronounced with the top 5 chaebol firms. Overall, our results together suggest that RPTs occur when the agency problem is severe and they are used as a means of tunneling, thus destroying firm value.

Background and Debate on Economic Power Concentration of Big Business Groups in Korea and Japan

Background and Debate on Economic Power Concentration of Big Business Groups in Korea and Japan

The Effect of Structural Changes in the Organizational Form of Business Groups: Evidence from Korea*

AbstractThis paper examines the effects of a series of regulatory changes that facilitated business groups in Korea to switch from a complex circular shareholding or “loop” structure to a more simplified and transparent pure holding company structure. Since these changes are likely to affect intra‐group dynamics of member firms in terms of their interdependence, we focus on changes in risk characteristics and how they are reflected in initial announcement returns. Using a business group‐level sample, we find that pure holding companies at the apex exhibit a significant decrease in beta subsequent to structural change, which is reflected in positive market reactions at the initial announcement. For other subsidiary member firms, however, we do not observe such patterns. On the other hand, idiosyncratic risk and volatility of operating performance significantly increase for both holding companies and subsidiaries following the switch. These results suggest that such structural changes alleviate business and financial interdependence among member firms, and that the benefits, if any, mostly accrue to (the shareholders of) the apex holding companies.

Business groups and institutional upheaval in emerging economies: Corporate venturing in Korea

In this paper we detail the nature of market-oriented institutional upheaval and its implications for business groups in Korea during the late 1990s. Employing case study methodology we identify four projects that were nurtured under corporate venture programs in response to this upheaval: two internal incubating projects and two new venture investment projects. We analyze these cases employing the concepts of resource fit and organizational misfit. Based upon these in-depth case analyses we generate a conceptual framework that managers can rely on for the choice of organizing mode of corporate venture projects. We conclude by discussing managerial implications and future research directions.

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

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.