Does the Professional Manager Blow the Whistle on Founding Families? New Evidence on the Dark Side of Family-Controlled Firm

Abstract

This paper investigates the relationship between family firm, internal, external governance and corporate fraud. We focus on the judicial and market attitude toward professional top managers, not controlling shareholder, involved in corporate fraud, especially in family-controlled business group in Korea, Chaebol. We find that top managers receive lighter sentences. The probability that a professional manager goes to prison is 35.7%p less than that of a controlling shareholder. Moreover, no top management ever actually goes to prison at an appellate court. The possibility that a professional manager is held pretrial drops by 39.2%p. Secondly, almost 55% of the professional top managers involved in corporate crimes come back to the position in the near future after sentencing decisions. Almost 84% of resurrected professional managers in the market had worked for the Chaebol-affiliated firms at the moment of their corporate crimes. More surprisingly, 87% of returned Chaebol managers take the executive position at their affiliated firm. Our findings suggest a possibility that the ill-functioned legal system and market for professional managers helps large shareholders such as founding families capture them to serves family interests.

Keywords: Family Firm, Controlling Shareholder, Professional Manager, Corporate Crime, Tunneling, Judicial System, Internal Labor Market

JEL Classification: G30, K40