Too Big to Jail? Company Status and Judicial Bias in an Emerging Market

20 Pages Posted: 4 Mar 2016

See all articles by Hansoo Choi

Hansoo Choi

KIPF (Korea Institute of Public Finance); Harvard University - Edmond J. Safra Center for Ethics

Hyoung Goo Kang

Hanyang University

Woojin Kim

Seoul National University - Business School

Changmin Lee

Hanyang University - School of Business

Jongsik Park

Ohio State University (OSU) - Fisher College of Business

Date Written: March 2016

Abstract

Manuscript Type. Empirical.

Research Question/Issue. This paper examines prosecutorial and judicial decisions to incarcerate the suspect upon indictment or conviction of embezzlement or breach of fiduciary duty in Korean firms. Our aim is to evaluate whether the judicial system is biased in favor of large business groups or chaebols in criminal cases.

Research Findings/Insights. Using a sample of 84 indictments and 78 convictions for embezzlement or breach of duty against managers of publicly traded firms in Korea between 2004 and 2008, we find that the probability of incarceration is much smaller if the indicted are associated with large business groups or large firms. In non‐large business group firms, initial disclosure of such accusation results in an average loss of a quarter of market value, and three quarters of convicted individuals are eventually removed from managerial positions. However, we observe neither such a loss nor turnover in large business group member firms.

Theoretical/Academic Implications. We identify a new determinant of judicial bias, namely the status of the company, in addition to individual‐level social status or class that has been examined in the previous literature. Such bias may reflect potential future career concerns of the prosecutors and judges who later become lawyers. The results also suggest that an additional motivation behind empire building or size‐maximizing behavior of top management is to effectively implement a legal strategy, a form of non‐market strategy.

Practitioner/Policy Implications. Corporate managers may apply our findings to manage legal risks and to formulate nonmarket strategies. However, biases in individual sentences may create system risk and economy‐wide inefficiencies. In order to reform the legal system, policymakers should take into account the externalities in individual sentencing decisions.

Keywords: Corporate Governance, Sentencing Bias, White Collar Crime, Chaebol, Korea

Suggested Citation

Choi, Hansoo and Kang, Hyoung Goo and Kim, Woojin and Lee, Changmin and Park, Jongsik, Too Big to Jail? Company Status and Judicial Bias in an Emerging Market (March 2016). Corporate Governance: An International Review, Vol. 24, Issue 2, pp. 85-104, 2016. Available at SSRN: https://ssrn.com/abstract=2741948 or http://dx.doi.org/10.1111/corg.12142

Hansoo Choi

KIPF (Korea Institute of Public Finance) ( email )

1924,Hannuri-daero
Sejong-si, 339-007
Korea, Republic of (South Korea)

Harvard University - Edmond J. Safra Center for Ethics ( email )

124 Mount Auburn Street
Suite 520N
Cambridge, MA 02138
United States

Hyoung Goo Kang

Hanyang University ( email )

222 Wangsimniro
Seongdong-gu
Seoul, 133-791
Korea, Republic of (South Korea)

Woojin Kim (Contact Author)

Seoul National University - Business School ( email )

1 Gwanak-ro, Gwanak-gu
Seoul, 08826
Korea, Republic of (South Korea)
82-2-880-5831 (Phone)

HOME PAGE: http://cba.snu.ac.kr/en/faculty?mode=view&memberidx=60582&major=6

Changmin Lee

Hanyang University - School of Business ( email )

222, Wangsimni-ro
Seongdong-gu
Seoul
Korea

Jongsik Park

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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