Controlling Families’ Risk Allocation in a Business Group

Abstract

This paper explores family business groups and their motivation for risk taking in each affiliate. We study whether the controlling family determines the level of risk taken by an affiliate in its business group based on the amount of family wealth that is invested in the affiliate. We find that the affiliates in which the controlling family has more (less) investment take less (more) risk. Our results indicate that the controlling family decides the riskiness of each affiliate based on the family’s interests at both the firm level and the business‐group level.

Controlling Shareholders' Value and Corporate Tax Avoidance*

“…Our results demonstrate that controlling shareholders mitigate corporate risk to increase their own wealth over the long term by reducing tax avoidance. Furthermore, if we view tax avoidance as one of the risky investment decisions (e.g., Guenther et al 2017), our finding is also consistent with Chae et al (2020), who suggest that controlling shareholders allocate corporate risk among the nexus of business group affiliates. Additionally, while Chen et al (2010) find that family firms are less tax aggressive than their nonfamily counterparts, our study suggests that tax aggressiveness can vary based on the controlling shareholders' wealth.…”

“…Our inference remains unchanged when we change the regression model by using the one-year cash effective tax rate, the GAAP effective tax rate, the book-tax difference, market value-based CSVALUE, and firm fixed effects. Moreover, our findings remain salient when we employ an instrumental variable approach using equity investment and a lagged cash effective tax rate (Kang et al 2017;Chae et al 2020). These findings are consistent with the view that controlling shareholders, in order to preserve firm value for coming generations, prefer long-term risk aversion (Chen et al 2010) to the short-term benefits of tax avoidance (i.e., cash tax savings).…”

“…We have explored the association between controlling shareholders' wealth and corporate-level tax avoidance among firms affiliated with a business group. This is an interesting issue because controlling family members of a business group seem to adjust their corporate-level activities based on factors that go beyond affiliated firm-level characteristics (Bae et al 2002;Baek et al 2006;Hwang and Kim 2016;Kang et al 2017;Chae et al 2020;Bae and Kim 2021). Using data from Korean firms affiliated with business groups, we find that CSVALUE is negatively associated with tax avoidance, and that this relation is stronger for (i) firms with a higher tax audit probability or higher detectability of tax avoidance, and (ii) firms with family members as CEOs or that are publicly traded.…”

“…Our sample period includes the 2008-2009 global financial crisis (GFC). Chae et al (2020) demonstrate that the risk-taking choices of the majority shareholder 9 Following Kang et al (2017), we control for firm size, leverage, liquidity, profitability, investment, age, a dummy for financial industries, number of affiliated companies, and diverse ratios. Detailed definitions of variables are presented in Appendix 1.…”

Family Feud: Succession Tournaments and Risk‐Taking in Family Firms*

“…Finally, our work extends the literature on chaebols. Existing studies (Bae et al 2002;Joh 2003;Baek et al 2006;Kang et al 2006;Almeida et al 2011;Chae et al 2020) mainly focus on the prevailing pyramidal control structure and resulting agency problems. Our approach differs from theirs, as we introduce potential succession tournaments within a family that arise due to the option-like payoff structure to heirs when deep ownership pyramids are present.…”