Executive Compensation When a Firm is a Business Group Member

39 Pages Posted: 7 Mar 2015 Last revised: 7 May 2015

See all articles by Hyungseok Kim

Hyungseok Kim

Korea Corporate Governance Service

Woochan Kim

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

Date Written: February 27, 2015

Abstract

This paper examines how executive pay is set when a firm is a business group member. Using Korea as a laboratory setting, we find that member firm’s cash compensation for its executives is positively linked to the stock performance of other member firms as well as its own. Further analyses reveal that this positive link to other members’ performance is consistent with the hypothesis of corporate resources being tunneled from one member to another for the benefit of the controlling family. We find that this link is stronger to the performance of others that are more likely to benefit from tunneling (firms in which the controlling family has cash flow rights greater than those of the subject firm) and in firms that are more likely to suffer from tunneling (firms in which the controlling family has control-ownership disparity above the sample median).

Keywords: executive compensation, business groups, chaebols, tunneling, cash flow rights, control-ownership disparity, expropriation risk

JEL Classification: G30, G32, G34

Suggested Citation

Kim, Hyungseok and Kim, Woochan, Executive Compensation When a Firm is a Business Group Member (February 27, 2015). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 447/2015. Available at SSRN: https://ssrn.com/abstract=2571504 or http://dx.doi.org/10.2139/ssrn.2571504

Hyungseok Kim

Korea Corporate Governance Service ( email )

76, Yeouinaru-ro, Yeongdeungpo-gu
Seoul, 150-977
Korea, Republic of (South Korea)
+82-2-3775-3781 (Phone)
+82-2-3775-2630 (Fax)

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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