Korean Business Groups Research Articles

Internal Capital Markets in Business Groups: Evidence from the Asian Financial Crisis

ABSTRACTThis paper examines capital reallocation among firms in Korean business groups () in the aftermath of the 1997 Asian financial crisis, and the consequences of this capital reallocation for the investment and performance of firms. We show that transferred cash from low‐growth to high‐growth member firms, using cross‐firm equity investments. This capital reallocation allowed chaebol firms with greater investment opportunities to invest more than control firms after the crisis. These firms also showed higher profitability and lower declines in valuation than control firms following the crisis. Our results suggest that chaebol internal capital markets helped them mitigate the negative effects of the Asian crisis on investment and performance.

A Study on the Effect of CEO Weeding-Out in Korean Business Groups on Strategic Change of their Affiliates

A Study on the Effect of CEO Weeding-Out in Korean Business Groups on Strategic Change of their Affiliates

Debt, Maturity, and Corporate Governance: Evidence from Korea

ABSTRACTUsing a unique survey data set, I examine how corporate governance practices of listed Korean firms can affect debt ratio and debt maturity structure. I find that firms with poor governance tend to have a higher debt ratio (especially short-term debt ratio) than firms with good governance. I also show that the documented relationships between corporate governance and debt ratio and between corporate governance and debt maturity are not significantly different between chaebol (Korean business group) and non-chaebol firms. These findings suggest that (short-term) debt financing can be used as a monitoring tool to mitigate agency problems because financial intermediaries monitor the managers of the borrowing firms. This study contributes to the corporate governance literature by providing evidence that debt capital, especially short-term debt, can be used as a complementary monitoring tool for poorly governed firms in an emerging economy.

The effect of issue obtrusiveness, issue congruence, and response strategies on the acceptance of crisis communication messages

Based on issue ownership theory, this study identifies the effects of issue obtrusiveness, issue congruence, and crisis response strategies on the level of acceptance of crisis communication messages employing 2 × 2 × 3 (issue obtrusiveness × issue congruence × response strategies: scapegoat, justification, reminder) experimental research. Two large Korean business groups (Hyundai and SK) were selected. There was a main effect in crisis response strategies and a three-way interaction effect. A crisis communication message was effective when a corporation owns congruent and unobtrusive issues. Implications for public relations research and practices were discussed.

On the Estimation of Transaction Costs of the Internal Transactions within Korean Business Groups

대기업집단의 계열사 간 내부거래는 독특한 거래성격 때문에 거래비용 가설을 검증할 수 있는 기회를 제공한다. 본 연구에서는 공정거래법 상 공정거래위원회 공시사항으로 강제된 2007년 7월 이후 2013년 말까지의 내부상품거래를 분석대상으로 상정하였다. 본 연구에서 거래비용 존재 하의 기업가치평가 모형을 도출하였으며, 모형의 계수추정을 통해 거래비용의 존재 여부를 파악하고, 거래비용의 크기를 추정하였다. 기업가치의 추정 결과를 바탕으로 대기업집단 계열사의 내부상품거래(소위 “일감 몰아주기”)에 관한 가설 검정 결과는 다음과 같이 요약된다. 첫째, 내부상품거래는 전반적으로 내부거래의 거래비용 절감 가설을 지지하는 결과를 보였다. 내부상품거래 실시기업은 기업가치의 약 24%에 달하는 거래비용 절감 혜택(거래편익)을 누리는 것으로 추정된다. 둘째, 대기업집단 소속 여부 혹은 전후방 산업연관 효과가 높은 업종에 속한다는 이유만으로 거래비용 절감이라는 긍정적 효과가 나타나지 않았다. 그러나 대기업집단에 속한 기업 중에서 내부상품거래를 실시한 기업만이 내부거래의 거래비용 절감 가설을 지지하는 결과를 보였다. 셋째, 내부상품거래 실시 여부의 결정요인 분석에 있어서 대리인비용 이론이나 거래비용 이론이 예상하는 바에 부합되는 결과가 나타났다. 기업지배구조 개선효과가 큰 기업일수록 내부상품거래를 더 많이 실시하였으며, 전후방 연관효과가 높은 석유화학, 정유, 자동차 업종 등에서 내부상품거래를 더 많이 실시하는 결과가 나타났다.

Internal knowledge broker and diversification: the case of Korean management research institutions

This study focusses on the organisational structure supporting the learning based on diversification strategy. The literature review exhibits that an internal knowledge brokerage institution is significantly accountable for managing knowledge in the diversified firms. The case studies of seven major Korean Chaebols, or business groups, exhibit that the managerial research institutions as internal knowledge brokers enable Korean business groups (Conglomerates) to manage knowledge from the broad areas efficiently. Both scholars and practitioners gain implications on how diversified firms can use the abundant pool of knowledge across diverse areas to support their major businesses.

Outside director appointment in Korean business groups: the role of stakeholder networks

This study sets out to explain what determines the appointment of outside directors in Korean business groups. Building on the extant theoretical literature on social network theory, the effect of stakeholder networks on the appointment of outside directors in Korean business groups is examined. With the assumption that a firm’s social network, which is comprised of the firm’s stakeholders, affects the appointment of outside directors, testable research propositions are presented.

"Divided We Stand, United We Fall: Internal Coupling Structure and Business Group Failure"

The role of internal coupling structure in business groups is a central concern in the business group literature; yet, most empirical studies focus on the performance of affiliated firms. This study investigates how the extent of coupling among firms in a group affects group-level performance. Coupling creates interdependence among group firms and compounds risk within groups. Moreover, coupling buffers group firms from environmental selection so that coupled groups sustain weak firms that would have failed otherwise, consequently reducing the survival chances of the whole group. Based on this logic, I propose that the greater the coupling of group firms, the higher the group failure rate, especially in resource-scarce environments. A longitudinal analysis of 5,850 Korean business groups over a 20-year period, 1988-2007, supports my predictions. Tight coupling among affiliated firms in a group through corporate governance and internal transactions increases the failure rate of business groups, especially ...

Exploration, learning, and environmental selection: Antecedents of subsidiary divestitures in Korean business groups

Exploration, learning, and environmental selection: Antecedents of subsidiary divestitures in Korean business groups

Market-oriented institutional change and R&D investments: Do business groups enhance advantage?

Emerging market firms (EMFs) are increasingly relying on innovation to find their competitive advantage, but our understanding of how institutional change affects firm innovation has been limited. We analyzed Korean manufacturing firms from 1994 to 2006 to test the proposition that market-oriented institutional change in an emerging economy alleviates firms’ financing constraints and monitoring problems and improves the effectiveness of their innovation activities. Institutional evolution in the economy was found to affect Korean business groups and independent firms differently. Institutional change reduced the financing constraints on independent firms more than for business group affiliates in R&D investment. Independent firms, however, appeared less capable than group affiliates of translating the benefits of improved institutional environments into efficient R&D investment. This asymmetry may lead to a wider gap in the efficiency of R&D investment between business group affiliates and independent firms.

Business group affiliation, ownership structure, and the cost of debt

This paper examines the relation between business group affiliation and the cost of debt capital. The co-insurance effect associated with business groups can reduce the cost of debt, while expropriation by controlling shareholders can raise the cost of debt. We find that firms affiliated with major Korean business groups (i.e., chaebols) enjoy a substantially lower cost of public debt than do independent firms, consistent with the co-insurance argument. We also examine several factors that influence the relation between group affiliation and the cost of debt, including a firm's uncertainty about the future payoffs of debtholders, pledgeable income, group-level resources, and position in the group structure. The results are all consistent with the co-insurance explanation. Our study highlights that the role of business groups in the debt market is distinct from the role of ownership structure.

Do acquiring firms knowingly pay too much for target firms? Evidence from earnings management in member-firm mergers in Korean business groups

In a typical stock-for-stock merger between the firms belonging to the same business group (member-firm mergers), the controlling shareholder’s holdings in the target firm are more than twice those in the acquiring firm. This difference in the controlling owner’s holdings in the acquiring firm and the target firm creates a strong incentive for the controlling owner to knowingly pay more for the target firm than the target firm is actually worth. We find that acquiring firms deflate earnings in order to increase the numbers of shares to be issued to the target firm’s shareholders. Furthermore, the level of earnings deflation is systematically related with the controlling owner’s expected benefits measured in several different ways. We also find that the stock price reaction to member-firm merger announcements is negatively correlated with the pre-issue-period earnings deflation. In addition, the results show that post-merger performance in member-firm mergers is lower than that in independent firm mergers.

Principal-Principal Agency Problem and Shareholder Activism

Drawing from the social movement perspective of corporate governance, we explore the underlying dynamics of agency conflict between controlling shareholders and minority shareholders, namely principal-principal agency problem. We argue that tunneling of resources from publicly traded firms to business group affiliates could be used as a device of minority shareholder expropriation and show how it is guided by motives of controlling families. In response, we explore how minority shareholder activism acts as a possible means through which minority shareholder accesses corporate governance in order to alleviate the principal-principal agency problem. Using rich related party transactions data of inter-firm purchases, sales, debts, and loans within Korean business groups, we examine how and why controlling shareholders in publicly traded firms wield their power over the firms and shift resources out from the firms to generate private benefit. We show how minority shareholder movement gained its presence in Korea and test the efficacy of minority shareholder activism in reducing related party transactions.

Corporate Governance and Payout Policy: Evidence from Korean Business Groups

Using a unique, comprehensive data set from a survey on corporate governance practices among Korean listed firms, this paper shows that business group (chaebol) firms have overall stronger governance practices but weaker shareholder rights and lower dividend payout ratios than independent firms do. We also find that the adverse effect of chaebol firms’ weak shareholder rights on dividend payout ratios appears to exemplify with the onset of the global financial crisis in 2008. In addition, our regression results show that the positive correlation between good corporate governance practices and dividend payout ratios is weaker among chaebol firms. Finally, we find that improving corporate governance enhances payout policies over time but is statistically significant only for independent firms. Our results suggest that the entrenched control by chaebol firm owners that stems from their control rights much above the cash flow rights puts less weight on protecting minority shareholders, resulting in smaller distributions of dividend payments.

The Role of Intra-Conglomerate Equity Investment: Evidence from Korean Business Groups

This paper demonstrates that group-affiliated firms have financial attributes that are different from those of stand-alone firms and suggests that these differences are consistent with ex-post consequences of receiving equity investment (EI) in business groups. Therefore, intra-group EI serves as an important driver of these differences. The paper verifies the results by considering the case of Korea's EI regulation. EI recipients invest more, but are less profitable than firms receiving no such investment. Group-affiliated firms reduce their dividend payout and short-term debt after receiving EI. Finally, recipients increase capital investment when they perceive their EI to be persistent, and those receiving massive EI use funds differently from those receiving normal EI. The results suggest that massive EI may involve ownership-related intentions, not financial support.

Transnational HR network learning in Korean business groups and the performance of their subsidiaries

This study explores (1) how two distinct dimensions of transnational human resources (HR) network learning, i.e. globally linked and locally leveraged learning, are related to the performance of the foreign subsidiaries of Korean business groups (chaebols) and (2) how strategic HR learning mediates the relationship between these two dimensions of transnational HR network learning and the performance of foreign subsidiaries. We propose that each dimension of transnational HR network learning is related independently and jointly to the performance of a chaebol's foreign subsidiaries. Our results suggest that locally leveraged HR learning has a stronger relationship with the performance of sales subsidiaries, whereas globally linked HR learning has a stronger relationship with the performance of manufacturing subsidiaries. In addition, we find that the interaction between the two dimensions of transnational HR network learning has a weaker positive relationship with the performance of foreign manufacturing subsidiaries than that of foreign sales subsidiaries.

Corporate governance and payout policy: Evidence from Korean business groups

Using a unique, comprehensive data set from a survey on corporate governance practices among Korean listed firms, this paper shows that business group (chaebol) firms have overall stronger governance practices but weaker shareholder rights and lower dividend payout ratios than independent firms do. We also find that the adverse effect of chaebol firms' weak shareholder rights on dividend payout ratios appears to exemplify with the onset of the global financial crisis in 2008. In addition, our regression results show that the positive correlation between corporate governance practices and dividend payout ratios is weaker among chaebol firms. Finally, we find that improving corporate governance enhances payout policies over time but is statistically significant only for independent firms. Our results suggest that the entrenched control by chaebol firm owners that stems from their control rights much above the cash flow rights puts less weight on protecting minority shareholders, resulting in smaller distributions of dividend payments.

Innovative Knowledge Transfer Patterns of Group-Affiliated Companies: The effects on the Performance of Foreign Subsidiaries

The objectives of this paper are to determine the patterns of innovative knowledge transfer strategies of globalized group-affiliated companies (GACs) from emerging markets and to assess the effects of these patterns on the performance of foreign subsidiaries. The sample are comprised of 52 Korean business groups, called chaebols , which consist of 181 parent firms and their 1,068 foreign subsidiaries as of the end of 2009. In the study, we employ the perspectives of organizational learning and internal resource-based theories of the organization, and the results are assessed based on cluster and post-hoc regression analyses. The authors identify five distinct groups of innovative knowledge transfer patterns, i.e., 1) small inactivator, 2) hyperactive transferor, 3) laissez faire exploiter, 4) hands-on exchange avoider, and 5) moderate researcher. Our cluster and post-hoc regression analyses support the main hypotheses, i.e., 1) there will be differences in patterns of innovative knowledge transfer strategies of globalized GACs within chaebols; and 2) these differences will influence the performance of foreign subsidiaries . Our contribution to the extant literature is to fill the vacuum that exists in the current empirical studies on 1) a positive vs. negative balance of exploratory and exploitative innovative knowledge exchanges among GACs within a business group and 2) the phenomenal patterns of innovative knowledge transfer and their effects on the performance of foreign subsidiaries in the context of emerging market GACs. Therefore, our analyses advance the research in the area of innovative knowledge management in the context of the emerging market business groups.

The Drivers and the Stock Market Assessment of Internal Capital Market: Evidence from Business Groups in Korea

AbstractUsing actual equity transactions between member firms in Korean business groups, we examine the effect of firm characteristics on transaction magnitude and the stock market's response to investment in the internal capital market (ICM). On the acquiring firm's side, financial slack is positively associated but controlling shareholder ownership is negatively associated with transaction magnitude. Profitability (leverage) of the issuing firm is negatively (positively) associated with transaction magnitude. Growth of the firms involved in the transaction does not affect the transaction magnitude or the stock market's response. The stock market responds negatively to diversification and large cash of the acquiring firm. Our findings suggest that idle cash of a firm with high ownership of minority shareholders is the source of funds in ICM, and such funds are directed to poorly performing affiliated firms, which are under the influence of the same controlling shareholder.

South Korea's efforts for structural changes in corporate governance of large Korean business groups after the Asian financial crisis

This study introduces the characteristics of large Korean business groups (chaebols) and reviews various efforts toward structural changes in South Korea to improve the accounting system and corporate governance in the post Asian financial crisis period. Using descriptive trend analysis, this study also examines the consequences of the structural changes. Our findings show that major important financial indicators of the Korean economy have improved, implying that Korea's efforts seem to be somewhat successful. However, some sophisticated indicators, such as the magnitude of ownership discrepancy between cash flow rights and voting rights and the level of discretionary accruals, are shown to be rather deteriorated, indicating that the efforts toward structural changes have not fully resolved the fundamental problems prevalent in large Korean business groups.