The Structure and Formation of Business Groups: Evidence from Korean Chaebols

57 Pages Posted: 9 Mar 2009 Last revised: 15 Sep 2011

Heitor Almeida

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Sang Yong Park

Yonsei University

Marti G. Subrahmanyam

New York University - Stern School of Business

Daniel Wolfenzon

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 20, 2010

Abstract

In this paper we study the determinants of business groups' ownership structure using unique panel data on Korean chaebols. In particular, we attempt to understand how pyramids form over time. We find that chaebols grow vertically (that is, pyramidally) as the family uses well-established group firms ("central firms'') to set up and acquire younger 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. Our evidence suggests that the (previously documented) lower profitability of pyramidal firms is partly due to a selection effect (e.g., the family optimally places low profitability firms in pyramids). To show this, we examine instances of large changes in the ownership structure of group firms. Specifically, we find that poor past performance predicts an increase in the degree of pyramiding in a firm's ownership structure. Most compellingly, we find that 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. We also examine the relative valuation of chaebol firms. We find that the group's central firms trade at a discount relative to other public group firms possibly due to the selection of low-profitability, high capital intensity firms into pyramids. Our results shed light on the process by which pyramids form, and provide new evidence on the performance and valuation of business group firms.

Keywords: Business groups, family firms, firm performance, pyramids, cross-shareholdings, parent company discount

JEL Classification: G32, G34

Suggested Citation

Almeida, Heitor and Park, Sang Yong and Subrahmanyam, Marti G. and Wolfenzon, Daniel, The Structure and Formation of Business Groups: Evidence from Korean Chaebols (July 20, 2010). NYU Working Paper No. FIN-08-012. Available at SSRN: https://ssrn.com/abstract=1354500

Heitor Almeida

University of Illinois at Urbana-Champaign ( email )

515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)

HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sang Yong Park

Yonsei University ( email )

Seoul 120-749
Korea, Republic of (South Korea)

Marti G. Subrahmanyam (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

Daniel Wolfenzon

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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