Tunneling or Value Addition? Evidence from Mergers by Korean Business Groups
56 Pages Posted: 14 Nov 2000
Date Written: October 2000
Business groups in emerging markets have the potential to create either value or agency problems. Using Korean mergers, we investigate the nature of business groups in emerging markets and examine whether Korean business groups (chaebols) add value to their member firms or provide the controlling shareholders with an opportunity for wealth transfer (tunneling). We show that chaebol-affiliated firms that performed well prior to the merger realize significantly negative announcement returns. We also find that chaebol bidders who acquired poorly performing targets within the same group and/or had concentrated equity ownership by owner-managers experience significantly negative abnormal returns. These types of mergers, however, have a significantly positive effect on the market value of the portfolio of other firms in the group. Our results support the tunneling view that firms belonging to business groups pay less attention to the maximization of individual firm value and make takeover decisions that are beneficial to only controlling shareholders.
JEL Classification: G32, G34
Suggested Citation: Suggested Citation