Brand Royalty Flows within Large Business Groups: The Effect of Holding Company Structure and Related Party Transactions Committees

Abstract

This study investigates the intragroup flows of brand royalties within large Korean business groups, known as chaebols. We find that member firms pay a greater amount of brand royalties when the business groups they are part of adopt a holding company governance structure, consistent with the bitter denunciation that chaebols transfer wealth from member firms to holding companies over which they have direct control. However, member firms pay a smaller amount of brand royalties when their related-party transactions (RPTs) are monitored by a designated RPT committee on the board of directors. The results show that monitoring RPTs is effective in mitigating the alleged unethical wealth transfer through excessive brand royalties within large business groups. Our study adds to the literature on RPTs by shedding new light on brand royalty, specifically by illustrating how intragroup brand royalties are determined and charged to member firms, and by introducing the RPT committees as a new internal governance mechanism to discourage abusive RPTs.

Keywords: Brand royalty; business group; chaebol; holding company; related party transactions committees.

JEL Classification: G38, G3, G, L20, L2, L, O53, O5, G3, G, M48, M4, M