Intragroup Propping: Evidence from the Stock-Price Effects of Earnings Announcements by Korean Business Groups

Bae, Gil S.; Cheon, Youngsoon; Kang, Jun‐Koo

doi:10.1093/rfs/hhn055

Cited by 123 publications

(105 citation statements)

References 28 publications

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“…7 Jian and Wong (2010) used a methodology partially based on to examine industry shocks and tunneling in Chinese state-owned firms during the years 1998-2002, but their study did not include firm fixed effects and their sample consisted solely of state-owned firms. Other papers that helped produce the conventional wisdom on tunneling and business groups (e.g., Bae et al 2002Bae et al , 2008Baek et al, 2006) rarely if ever included firm fixed effects and rarely if ever included a comparison reference set of private stand-alones. It is one thing to show that a nontrivial number of business groups commit expropriation and quite another to show that groups on average 24 business activities than their stand-alone counterparts.…”

Section: Discussionmentioning

confidence: 99%

A Reexamination of Tunneling and Business Groups: New Data and New Methods

2012

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One of the most rigorous methodologies in the corporate governance literature uses firms' reactions to industry shocks to characterize the quality of governance. This methodology can produce the wrong answer unless one considers the ways firms compete. Because macro-level shocks reverberate differently at the firm level depending on whether a firm has a cost structure that requires significant adjustment, the quality of governance can only be elucidated accurately analyzing a firm's business strategy and their corporate governance. These differences can help one determine whether the fruits of a positive macro-level shock have been expropriated by insiders. Using the example of Indian firms, we show that an influential finding is reversed when these differences are considered. We further argue that the conventional wisdom about tunneling and business groups will need to be reformulated in light of the data, methodology, and findings presented here. The corporate governance literature of the past decade has focused on identifying drivers of superior or deficient corporate governance. One of the most rigorous methodologies uses firms' reactions to industry shocks to characterize the quality of governance. We propose that this methodology can produce the wrong answer unless one takes into account the different ways in which firms compete (that is, their business strategy). Because macro-level shocks reverberate differently at the firm level depending on whether a firm has a cost structure that requires significant cost adjustment, the quality of governance can only be elucidated accurately by means of simultaneous analysis of firms' business strategy and their corporate governance. Only by acknowledging these differences in cost structure can one determine whether the fruits of a positive macro-level shock have been expropriated by a firm's insiders. Using the example of Indian firms, we show that an influential finding is reversed when we take these differences into account. We further argue that the conventional wisdom about tunneling and business groups will need to be reformulated in light of the data, methodology, and findings presented here.

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Section: Discussionmentioning

confidence: 99%

A Reexamination of Tunneling and Business Groups: New Data and New Methods

2012

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“…The case of propping is documented by Friedman et al (2003) who find it particularly significant in high leverage groups, since propping is used as a device to make debt attractive to investors in countries with weak legal systems. More recently, Gonenc and Hermes (2008) and Bae et al (2008) investigated propping respectively in Turkish and Korean business group firms, supplying further evidence for its existence. A different effect of the conflict of interests between owners and minority shareholders is highlighted by Faccio et al (2003).…”

Section: The Bright and Dark Sides Of Icmsmentioning

confidence: 86%

Do Inter-firm Networks Make Access to Finance Easier? Issues and Empirical Evidence

Scalera¹,

Zazzaro²

2011

Contractual Networks, Inter-Firm Cooperation and Economic Growth

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Does participation in inter-firm networks make access to credit easier for firms? Is finance a motivation driving the formation of inter-firm networks? During the last twenty years these two questions have been hotly debated by economists both theoretically and empirically. In this paper, we selectively review the literature on inter-firm networking, internal capital markets and access to external credit.

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“…In our article, we summarize results of three major studies by Bae et al (2002) and Baek et al (2006), who provide evidence of systematic tunneling within chaebols in mergers and acquisitions and in private security offerings, and Bae et al (2008), who document systematic evidence of a different form of expropriation of minority shareholders, called reverse tunneling or propping. Bae et al (2002) study whether chaebols' controlling shareholders use mergers and acquisitions to conduct tunneling.…”

Section: Tunneling Within South Korean Chaebolsmentioning

confidence: 99%

“…This ownership chain continues, allowing CS to be in full control of all member firms in the chaebol, while reducing the loss in downstream firms because CS owns very little of these firms. According to Bae et al (2008), as of 1998, the 30 largest chaebols in South Korea had an average of 26.8 affiliated firms per conglomerate, kept average cross-debt guarantee and cross-shareholding ratios of 75.15% and 34.49%, respectively, and the controlling families of these chaebols held, on average, only 10.96% equity ownership of these firms.…”

Section: South Korean Chaebolsmentioning

confidence: 99%

“…The controlling families of South Korean chaebols are content to claim, on average, only 10.96% of the value generated by their firms while maintaining complete control of the operations of all member firms (e.g., Bae et al, 2008). The reason for this apparent inconsistency lies in the chaebols' ability to increase the value received by the controlling families, beyond the 10.96% cash-flow claim, by tunneling out the conglomerates' resources for maximization of the personal wealth of these controlling families.…”

Section: Tunneling Within South Korean Chaebolsmentioning

confidence: 99%

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