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http://hdl.handle.net/2451/27854
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| Title: | The structure and formation of business groups: Evidence from Korean Chaebols |
| Authors: | Subrahmanyam, Marti
Almeida, Heitor
Wolfenzon, Daniel
Park, Sang Yong |
| Issue Date: | 2-Feb-2009 |
| Series/Report no.: | FIN-08-012 |
| Abstract: | In this paper we study the determinants of business groups’
ownership structure using a unique dataset of Korean chaebols, and a set
of new metrics of group ownership structure. We find that chaebols grow
vertically (that is, pyramidally) as the family uses well-established
group firms (“central firms”) to set up and acquire firms
that have low profitability and high capital requirements. Chaebols grow
horizontally (that is, using direct family ownership) when the family
acquires firms that are highly profitable and require less capital. We
also provide direct evidence that the low profitability of firms owned
through pyramids is partly due to a selection effect: the profitability
of new group firms in the year before they are added to the group
predicts whether they are added to pyramids or controlled directly by
the family. The relationships between pyramids, profitability, and
capital intensity that we uncover do not appear to be due to the
separation between ownership and control induced by pyramids. Finally,
we find that the selection of low-profitability firms into pyramids
causes the group’s central firms to trade at a discount relative
to other public group firms. Taken together, these results suggest that
controlling families optimally design the ownership structure of the
group in a manner that is consistent with theory. |
| URI: | http://hdl.handle.net/2451/27854 |
| Appears in Collections: | Finance Working Papers
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