Estimating the Value of Absolute Power: Evidence from Judiciary Decision Event on Controlling Shareholders in Large Business Group

Abstract

This paper estimates the impact of judicial decision, mainly the prosecution and final court sentencing for controlling shareholders’ corporate crime, embezzlement, breach of fiduciary duty etc., on the market value of a firm. A controlling shareholder in Korea Large Business Group, Cahebol, being indicted in custody or being imprisoned at the final court could provide an experimental setting for the absence of the real boss. First, the judicial decision is generally without any significant group-wide impact on the value. Second, when the boss is being absent at the pre-trial stage, the portion of affiliated firms receiving positive, 46% and negative impact, 54% is almost even. Moreover, even though the controlling shareholder is being imprisoned at the final court 38% of affiliated firms have a positive CAR. Finally, the effect of court decision on affiliated firms within the same business group is asymmetric. It has a positive effect on the affiliate at which a controlling shareholder holds large portions of shares. However, it has a negative impact on the affiliate to grow. The real boss is being more valued at the firm with growing environments. The judiciary decision could make value transfers between affiliates within the same business group.

Keywords: Family Firm, Controlling Shareholder, Corporate Crime, Judicial System, Event Study

JEL Classification: G30