Governance Transparency and Firm Value: Evidence from Korean Chaebols

Abstract

We examine Korean business groups' transition from circular-shareholding structures to (relatively simple) pyramidal-shareholding structures between 2011 and 2018. When firms were removed from ownership loops, chaebol families' control or incentive conflicts in them were unaffected; yet their values declined in accordance with families' incentive conflicts. Non-loop group firms' values increased (declined) when little (significant) agency issues that were difficult to identify under circular-shareholding structures existed. As families' incentive conflicts become clearer ("governance transparency"), earnings responsiveness increases but, by enabling investors to update priors about the relative severity of agency issues across group firms, firm values can increase or decrease.

Keywords: Business group; Cross shareholding; Circular shareholding; Pyramidal ownership; Governance transparency; Ownership transparency; Valuation; Earnings response coefficient

JEL Classification: G18, G34, G38, G41, L51, M14, M52