Business Groups and Tunneling: Evidence from Private Securities Offerings by Korean Chaebols

Abstract

Using a comprehensive sample of equity-linked private securities offerings by Korean firms from 1989 to 2000, we examine whether such offerings can be used as a mechanism for tunneling among firms belonging to a chaebol. We find that the chaebol-affiliated issuers sell private securities at a larger discount when the controlling shareholders are expected to receive greater wealth gains from the discount. We also find that the chaebol-affiliated issuers realize an 8.8% higher announcement return than do other types of issuers if they sell private securities at premium to other member firms in the same group, and if the controlling shareholders receive positive net gains from equity ownership in issuers and acquirers. In contrast, the member acquirers realize a 5.8% lower announcement return for such deals. Furthermore, a one standard deviation increase in the discount rate is associated with a 9.3% (11.4%) lower (higher) return for chaebol-affiliated issuers with good past performance (member acquirers) than for other types of issuers (acquirers). These results are consistent with tunneling within business groups and suggest that the tunneling effect is economically large and significant.

Keywords: Tunneling, Private Securities Offerings, Chaebol, Announcement Returns, Controlling Shareholders

JEL Classification: G32, G34, K22