The Value of Official Business Group Affiliation: Evidence from a Change in Korean Chaebol Designation Policy

Abstract

The Korean government doubled the total assets threshold for its large business group (chaebol) designation policy in 2016. Exploiting this policy change, I examine the value implications of a firm’s chaebol affiliation. My results suggest that firms affiliated with business groups that had become non-chaebols because of the policy change experienced substantial decreases in value and investment and increased financial frictions, compared with similar but unaffected chaebol-affiliated firms. Stock market reactions to announcements regarding the policy change did not predict its long-term value implications.

Keywords: Chaebol, business group designation, corporate investment, Korean regulation, firm values

JEL Classification: G30, G32, G38