Business Group Affiliation, Ownership Structure, and the Cost of Debt

Posted: 30 Mar 2012 Last revised: 10 Aug 2018

See all articles by Hae-Young Byun

Hae-Young Byun

Independent

Sunhwa Choi

Sungkyunkwan University

Lee-Seok Hwang

Seoul National University - College of Business Administration

Robert Kim

University of Massachusetts Boston

Date Written: December 31, 2013

Abstract

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.

Keywords: Business Groups, Ownership, Cost of Debt Capital, Co-Insurance

JEL Classification: G12, G32, G34

Suggested Citation

Byun, Hae-Young and Choi, Sunhwa and Hwang, Lee-Seok and Kim, Robert, Business Group Affiliation, Ownership Structure, and the Cost of Debt (December 31, 2013). Journal of Corporate Finance, Vol. 23, No. 5, 2013. Available at SSRN: https://ssrn.com/abstract=2031438 or http://dx.doi.org/10.2139/ssrn.2031438

Hae-Young Byun

Independent ( email )

No Address Available

Sunhwa Choi (Contact Author)

Sungkyunkwan University ( email )

Sunkyunkwan University Business School
25-2, Sungkyunkwan-ro, Jongno-gu
Seoul, 03063
Korea, Republic of (South Korea)

Lee-Seok Hwang

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Robert Kim

University of Massachusetts Boston ( email )

100 Morrissey Blvd.
College of Management
Boston, MA 02125
United States

HOME PAGE: http://ssrn.com/author=1376774

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