Korean Business Groups Research Articles

Do firms increase ESG activities during periods of geopolitical risk? Evidence from Korean business groups

This study examines the impact of the geopolitical risk (GPR) on the environmental, social, and governance (ESG) activities of South Korean business groups. Our empirical results indicate that GPR is positively associated with the ESG activities of South Korean firms, and this relationship is more pronounced among business groups. Furthermore, our results imply that South Korean business groups prioritizing their reputation or operating in a competitive market increase their ESG activities when GPR increases. Specifically, South Korean firms strategically increase their ESG activities during periods of significant GPR to enhance their reputation and build moral capital.

The effect of financial statement comparability on the gaps between credit ratings and bond implied ratings: Focusing on the moderating effect of Korean business groups

This study analyzes whether financial statement comparability (FSC) affects the gaps between credit ratings (CRs) and bond implied ratings (BIRs), and Korean business groups mitigate the relation between FSC and rating gaps. Korean business groups have the diversified corporate governance structure and complex circulating investments, which makes it difficult for outside stakeholders to compare accounting information between firms in the same industry. Therefore, we propose the hypothesis that business groups are likely to moderate the negative relation between FSC and rating gaps. We find evidence, consistent with the hypotheses, that rating gaps are lower when FSC is greater. It also documents that business groups mitigate the negative relation between FSC and rating gaps. To the best of our knowledge, this research is the first empirical study to test the relation between FSC and rating gaps and the moderating effect of Korean business groups.

선택적 CSR과 외부주주의 감시에 대한 연구

Purpose – This study seeks to explore the impact of outside shareholders on CSR, and discuss how outside shareholders interact with corporate ownership structure to affect CSR. Design/Methodology/Approach – Using longitudinal data from 297 publicly listed companies in Korean large business groups, the study examined the direct and interaction effects of outside shareholders and corporate ownership structure on CSR. It focused on the impact of institutional stockholders holding 5% or more of the equity shares and foreign investors on corporate governance. Findings – While institutional investors do not significantly affect CSR, foreign investors have a positive impact and moderate the effects of corporate ownership structure on CSR. They respectively moderate the positive impact of controlling shareholder ownership and the negative impact of control-ownership disparity on CSR. These findings suggest that foreign investors play a role as independent monitors in aligning corporate governance with CSR objectives in large Korean business groups. Research Implications – The findings highlight the possibility of CSR being exploited for private benefits by controlling shareholders without effective corporate governance. This study emphasizes the need for monitoring and balanced oversight in reducing conflicts over CSR, suggesting the importance of outside shareholder engagement in corporate governance. It posits that outside shareholders, particularly foreign investors, are instrumental in fostering responsible corporate governance and CSR practices.

Control Beyond Ownership: Open‐Book Accounting in Unbalanced Supply Chain Networks*

AbstractOpen‐book accounting is a practice to disclose the full cost structure of suppliers to customers to achieve cost efficiency in supply chains. However, the dominant market power of customers could interfere with this goal in practice. Using unique data on the suppliers of large Korean business groups, we find that open‐book accounting is associated with profit rate regulation by customers. Suppliers' price growth is capped despite the increase in supplied goods. Profit rates of suppliers significantly co‐move in times of low average profitability. Using an exogenous regulatory reform that outlawed coercive open‐book accounting, we find the tendencies significantly reversed post‐reform.

Firm Visibility as a Liability After Financial Fraud: The Case of South Korean Business Groups

Firm Visibility as a Liability After Financial Fraud: The Case of South Korean Business Groups

Inter-Unit Executive Redeployment in Multiunit Firms: Evidence from Korean Business Groups

Building on the literature on resource reconfiguration theory, we formulate a new theoretical framework that explains how executive redeployment within a diversified firm transfers different types of human capital embodied in executives to different units facing specific business challenges. In the empirical context of Korean business groups, we find that executives with unit-specific human capital, like turnaround experience, competitive experience, and international expansion experience, are redeployed to units with corresponding business challenges like financial difficulties, intensifying competition, and early-stage international expansion, respectively. We also show that executives with unit-generic human capital, like corporate management practices and interunit coordination experiences, are redeployed to younger units seeking to establish corporate-level policies and practices. Additional analyses also show that the value of firm-specific human capital in driving the redeployment of executives is contingent on their functional orientation and seniority.Funding: S.-J. Chang appreciates financial support from the Lim Kim San Chair Professorship from National University of Singapore and Techno SK Chair Professorship from KAIST. Y.-C. Kim is also grateful for financial support from the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea [NRF-2022S1A5A2A01044597].Supplemental Material: The e-companion is available at https://doi.org/10.1287/orsc.20.14525 .

Inter-Unit Executive Redeployment in Multiunit Firms: Evidence from Korean Business Groups

Building on the literature on resource reconfiguration theory, we formulate a new theoretical framework that explains how executive redeployment within a diversified firm transfers different types of human capital embodied in executives to different units facing specific business challenges. In the empirical context of Korean business groups, we find that executives with unit-specific human capital, like turnaround experience, competitive experience, and international expansion experience, are redeployed to units with corresponding business challenges like financial difficulties, intensifying competition, and early-stage international expansion, respectively. We also show that executives with unit-generic human capital, like corporate management practices and interunit coordination experiences, are redeployed to younger units seeking to establish corporate-level policies and practices. Additional analyses also show that the value of firm-specific human capital in driving the redeployment of executives is contingent on their functional orientation and seniority. Funding: S.-J. Chang appreciates financial support from the Lim Kim San Chair Professorship from National University of Singapore and Techno SK Chair Professorship from KAIST. Y.-C. Kim is also grateful for financial support from the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea [NRF-2022S1A5A2A01044597]. Supplemental Material: The e-companion is available at https://doi.org/10.1287/orsc.2020.14525 .

The Association between Voluntary Carbon Disclosure and Accounting Comparability: Examining the Moderating Effect of Korean Business Groups

This study investigates whether voluntary carbon disclosure to the Carbon Disclosure Project (CDP) is positively related to accounting comparability, one of the dimensions for evaluating the quality of financial reporting. It especially questions whether Korean business groups moderate the relationship between carbon disclosure and accounting comparability. It finds that accounting comparability is greater when firms voluntarily disclose carbon emissions to the CDP. It also finds a moderating effect of Korean business groups on the relationship between carbon disclosure and accounting comparability. These findings suggest that ethical environmental management in non-business groups encourages managers to provide comparable financial reports, whereas opportunistic environmental management in business groups results in managers producing less comparable financial reports. Therefore, this study is meaningful in finding that the voluntary disclosure of carbon emissions is a factor that increases the quality of financial reporting and in proposing that the environmental commissions provide sufficient guidance to prevent opportunistic disclosure of carbon emissions.

Brand royalty flows within large business groups: The effect of holding company structure and related party transactions committees

AbstractThis study investigates the intragroup flows of brand royalties within large Korean business groups, known as chaebols. We find that member firms pay a greater amount of brand royalties when the business groups they are part of adopt a holding company governance structure, consistent with the bitter denunciation that chaebols transfer wealth from member firms to holding companies over which they have direct control. However, member firms pay a smaller amount of brand royalties when their related‐party transactions (RPTs) are monitored by a designated RPT committee on the board of directors. The results show that monitoring RPTs is effective in mitigating the alleged unethical wealth transfer through excessive brand royalties within large business groups. Our study adds to the literature on RPTs by shedding new light on brand royalty, specifically by illustrating how intragroup brand royalties are determined and charged to member firms, and by introducing the RPT committees as a new internal governance mechanism to discourage abusive RPTs.

Tunneling through trademarks

This study documents how trademarks can be used to benefit controlling families at the expense of outside minority shareholders. Using a sample of Korean business group firms from 2017 to 2020, we find evidence to support this. First, firms are more likely to be licensor firms if the family holds higher cash flow rights. Second, we find that the association between a firm's sales and the likelihood of it being a licensee firm (or the amount of trademark royalty payments) gets stronger when the family's cash flow rights in the firm fall further below those in the licensor firm (i.e., higher cash flow rights differentials). Third, we find that the negative association between a firm's trademark royalty payments and shareholder distribution (i.e., dividend payouts and stock repurchases) gets stronger when family's cash flow rights differentials widen. Fourth, we find that the share prices of licensee firms react negatively on the day when the full disclosure of trademark royalty payments became mandatory, and that this tendency is stronger in firms with higher trademark royalty payments and higher cash flow rights differentials. Finally, these results manifest more significantly in pure holding company groups, where alternative tunneling channels are limited.

Inter-state Political Risks, Types of Corporate Political Ties and International Joint Ventures

Inter-state political conflicts are an important source of political risks deterring firms’ cross-border collaborations. We propose how two types of business leaders’ domestic political ties, family ties and social ties, can have opposing effects on firms’ capacity to cope with inter-state political risks, in a context where both types of ties are salient and have distinct social meanings. While both can help the firms navigate regulatory uncertainties at home, family ties can tarnish the firms’ legitimacy in the host country by identifying the firms with the state, outweighing their benefits. We find empirical support in Korean business groups’ entry into China through joint ventures during 1990-2005. Our study contributes to the literatures on political risks and corporate political ties by disentangling ties of different nature.

Business Groups, Hierarchies and Risk Preferences: How Family CEOs Respond to Performance Shortfalls

Despite their global presence, family business groups have not gained much attention from scholars concerning the behavioral theory of the firm (BTOF). As a hierarchical organization, family business groups as a whole are managed by the group chairperson while his or her family members sometimes run individual member firms as subunits and become family CEOs. Prior studies in the BTOF have revealed that subunits in a hierarchical organization take a risk in response to their performance below aspiration levels and, in doing so, may have assumed that subunit managers have a non-family relationship with top managers. But this assumption limits the application of the BTOF to family CEOs because they are bound to the group chairperson by kinship. We fill this gap by examining how member firms run by family CEOs respond to their underperformance. We develop a novel theory that family CEOs are concerned about how their firm’s underperformance might spill over and hurt their family’s socioemotional wealth and so their firm becomes risk averse in the face of the performance shortfalls. We test this argument using matched samples of member firms managed by family CEOs and professional CEOs in Korean business groups. We also find that underperforming firms become more risk averse when their CEO is the chairperson’s direct descendants, rather than non-direct family members, and the chairperson pays attention to regulation policies challenging the family-dominant governance structure. This study makes a number of theoretical contributions to research in the BTOF and research on family businesses.

Internal capital markets, corporate investment, and the COVID-19 pandemic: Evidence from Korean business groups

This paper examines whether the investment of Korean business group (“chaebol”) affiliated firms behaved differently from that of non-chaebol firms in response to the COVID-19 outbreak. I show that chaebol firms cut back investment to a lesser degree than similar non-chaebol firms. Chaebol firms with higher-than-industry-median market-to-book ratios invested more and experienced less decline in their stock prices, while I do not find such relationships for non-chaebol firms. This paper provides evidence that chaebol internal capital markets helped mitigate the negative effects of the pandemic on firm investment and value.

Owner risk and firm valuation: evidence from Korean business group

Since Berle and Means (1932) and Jensen and Meckling (1976), numerous empirical studies have been done on corporate governance regarding ownership structure, board characteristics, and monitoring mechanisms. However, there is little empirical evidence of the relationship between owner risk and firm valuation. We investigate the relationship using the unique owner risk index score data of Korean business groups. A high score means low owner risk. We find that there is a positive relationship between owner risk index score and firm valuation for Korean business groups. Specifically, the positive relationship is statistically significant in the professionalism and quality or ethical management without group dummy. The positive relationship is statistically significant in the transparency and accountability or ethical management with group dummy. The results suggest that owner risk is an important governance factor in affecting firm valuation.

Owner risk and firm valuation: evidence from Korean business group

Owner risk and firm valuation: evidence from Korean business group

Value‐destroying Mergers: Evidence from Korean Business Groups*

AbstractIn this study, we find evidence of tunneling in mergers among affiliated firms that belong to Korean business groups. Using a recent sample of Korean mergers during the 2000–2020 period, we find that control‐motivated mergers to enhance the controlling family’s control over the business group significantly decrease the target’s value and that of the value‐weighted combined portfolio of the acquirer and target. Our evidence indicates that tunneling persisted even after the implementation of several governance reforms in Korea following the 1997 Asian financial crisis, casting doubt on the effectiveness of those reforms in curbing the tunneling behaviors of Korean business groups.

R&D investment decisions in business groups: Evidence from a natural experiment

AbstractResearch Question/IssueThis paper examines R&D investment decisions in firms under a pyramidal ownership structure in the context of South Korea.Research Findings/InsightsUsing the Monopoly Regulation and Fair Trade Act, which places limits on group affiliates' equity investments, we provide new evidence that controlling owners tend to increase long‐term R&D expenditures more in firms that are largely subject to the equity investment regulation in South Korea. Moreover, this result is more significant for firms for which the owners have low cash‐flow rights, firms located in the lower layers of the pyramid, and firms that hold less equity shares than do other group affiliates.Theoretical/Academic ImplicationsThis study contributes to the literature that focuses on R&D investment decisions by providing empirical support regarding how firms' relative status within their business group influences the firms' R&D investment decisions in South Korea.Practitioner/Policy ImplicationsThis study provides important insight into the positive policy implications of the equity investment regulation on R&D investments for Korean business groups.

Acquiring firms' earnings management in stock-for-stock mergers within Korean business groups

PurposeThis study examines acquirers' earnings management in intragroup mergers to investigate whether stock-for-stock mergers between affiliated firms within the same family-controlled business group facilitate the controlling shareholder's rent seeking. Specifically, it investigates the acquiring firm's incentive to inflate premerger-announcement earnings in intragroup mergers given the controlling shareholder's relative equity holdings in the target and acquiring firms. The authors also examine how creditor monitoring affects premerger-announcement earnings in intragroup mergers compared to mergers between independent firms.Design/methodology/approachUsing univariate analysis, panel regression based on accruals and cross-sectional regression based on discretionary accruals, the authors compare earnings management in mergers between affiliated firms with that in mergers between independent firms in the context of Korean business groups. The authors also compare the effects of creditors on earnings management in both cases.FindingsAcquirers' premerger-announcement positive abnormal accruals are less evident in mergers between affiliated firms than in mergers between independent firms. These accruals decrease with high financial leverage only in the latter case, suggesting that creditor monitoring mitigates earnings management only in independent firm mergers.Originality/valueThe authors examine intragroup mergers, unlike previous studies, which focus on unaffiliated firm mergers. They also contribute to the literature on stock-for-stock mergers, showing that lender monitoring can mitigate the acquiring firm's premerger earnings management in unaffiliated firm mergers but not in intragroup mergers. These findings suggest that stock-for-stock mergers between affiliated firms may facilitate the controlling shareholders' rent seeking, which has policy implications for emerging markets with large family-controlled business groups.

Internal Capital Markets, Corporate Investment, and the COVID-19 Pandemic: Evidence from Korean Business Groups

This paper examines whether the investment of Korean business group ("chaebol") affiliated firms behaved differently from that of non-chaebol firms in response to the COVID-19 outbreak. I show that chaebol firms cut back investment to a lesser degree than similar non-chaebol firms. Chaebol firms with higher-than-industry-median market-to-book ratios invested more and experienced less decline in their stock prices, while I do not find such relationships for non-chaebol firms. This paper provides evidence that chaebol internal capital markets helped mitigate the negative effects of the pandemic on firm investment and values.

Brand Royalty Flows within Large Business Groups: The Effect of Holding Company Structure and Related Party Transactions Committee

This paper investigates the intragroup flows of brand royalties within large Korean business groups, known as chaebols. We find that business group member firms pay a greater amount of brand royalties when the associated business groups adopt a holding company governance structure, consistent with the bitter denunciation that chaebols transfer wealth from member firms to holding companies over which they have direct control. However, member firms pay a smaller amount of brand royalties when their related party transactions (RPTs) are monitored by a designated RPTs committee on the board of directors. The results suggest that the monitoring of RPTs is effective in mitigating the alleged unethical wealth transfer via brand royalties of large business groups.