Intra-Group Propping: Evidence from the Stock-Price Effects of Earnings Announcements by Korean Business Groups

Abstract

Using a large sample of earnings announcements made by firms belonging to Korean chaebols, we examine propping (i.e., negative tunneling) within a chaebol. Consistent with the market's ex-ante valuation of intra-group propping, we find that the announcement of increased (decreased) earnings over the previous year by a chaebol-affiliated firm has a positive (negative) effect on the abnormal return for the value-weighted portfolio of other non-announcing affiliates in the same group; that is, abnormal returns for the portfolios of non-announcing affiliates increase by 1.1% as those for the announcing firms increase by one standard deviation. We also find that the sensitivity of abnormal returns for the value-weighted portfolio of non-announcing affiliates to abnormal returns for the announcing firms is higher if the cash flow right of the announcing firm's controlling shareholder is higher. The sensitivity is also higher if the announcing firm is larger, performs well in the past, and has a higher debt guarantee ratio.

Keywords: Tunneling, Propping, Controlling shareholders, Earnings announcements, Chaebol, Announcement effects

JEL Classification: G12, G32, G34, G14, M41, M43, M47