When Heirs Become Major Shareholders: Evidence on Tunneling and Succession Through Related-Party Transactions

52 Pages Posted: 22 Mar 2014 Last revised: 22 Aug 2017

See all articles by Sunwoo Hwang

Sunwoo Hwang

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Woochan Kim

Korea University Business School; European Corporate Governance Institute (ECGI); Asian Institute of Corporate Governance (AICG)

Date Written: March 19, 2014

Abstract

In family firms, the succession of controlling equity stake to next generation is an issue of paramount importance. This, however, can be a major challenge in the presence of heavy inheritance or gift tax burden (high tax rate and absence of tax-saving vehicles, such as trusts or foundations) and in the absence of dual-class equity. Such regulatory environment may lead families to seek alternative ways of succession. As for families controlling business groups, one way of doing so is making use of related-party transactions among member firms. By favoring firms where the heir holds significant equity stake, the family can tunnel corporate resources to the heir. Eventually, the firm can grow large enough to acquire controlling equity stakes in other firms within the group. In this paper, we investigate this possibility using Korean chaebol firms during a sample period of 2000-2009. We identify firms where heirs become a major shareholder (treatment group) and compare them against their year-industry-size-matched firms (control group) before and after the ownership change. Difference-in-differences test with firm fixed effects reveal that treatment group firms experience greater related-party transactions, benefit from them in terms of earnings, pay out more dividends, and become more important in controlling other firms in the group.

Keywords: family firm, business group, chaebol, succession, related-party transactions, control-enhancement

JEL Classification: G30, G32, G34

Suggested Citation

Hwang, Sunwoo and Kim, Woochan, When Heirs Become Major Shareholders: Evidence on Tunneling and Succession Through Related-Party Transactions (March 19, 2014). ECGI - Finance Working Paper No. 413/2014; KDI School of Pub Policy & Management Paper No. 14-01. Available at SSRN: https://ssrn.com/abstract=2411412 or http://dx.doi.org/10.2139/ssrn.2411412

Sunwoo Hwang

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://sites.google.com/view/sunwoohwang

Woochan Kim (Contact Author)

Korea University Business School ( email )

LG-POSCO Bldg #524
Anam-Dong, Seongbuk-Ku
Seoul, Seoul 136701
+822-3290-2816 (Phone)
+822-922-7220 (Fax)

HOME PAGE: http://biz.korea.ac.kr/professor/wckim

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Asian Institute of Corporate Governance (AICG) ( email )

1, 5-ga, Anam-dong
Sungbuk-gu
Seoul, 136-701
Korea, Republic of (South Korea)

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