Governance Transparency and Firm Value: Evidence from Korean Chaebols

Abstract

We examine Korean business groups' transition from opaque circular-shareholding structures to (relatively simple) pyramidal-shareholding structures between 2011 and 2018. When firms were removed from ownership loops, chaebol families' control and incentive conflicts in them were unaffected. Yet these firms' values declined, especially when controllers had greater incentive conflicts. We show these changes are explained by a resolution of uncertainty about controllers' incentives ("governance transparency'"), which increases earnings responsiveness and enables investors to update priors about the severity of agency issues across group firms. Combined, these two channels result in value increases for some group firms but declines in others.

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