Economic shock, owner-manager incentives, and corporate restructuring: Evidence from the financial crisis in Korea

We examine how owner-managers incentives and firm-specific measures of corporate governance affect restructuring decisions during an economy-wide shock. Using a large sample of Korean firms that had experienced a severe financial crisis during 1997-1998, we find that the likelihood of restructuring is negatively related to the divergence of cash flow rights and control rights of controlling shareholders, and that the announcements of restructuring by chaebol firms with such divergence are greeted more negatively by investors. However, firm-specific measures of corporate governance such as total debt, bank loans, and equity ownership by unaffiliated financial institutions mitigate these negative effects, thereby influencing firms to choose value-maximizing restructuring policies. Our results suggest that the controlling shareholders' incentives to expropriate other investors are high during an economic shock. Our results also highlight the importance of corporate governance in mitigating such expropriation incentives, and provide important implications for the role of corporate governance during an economic shock, such as the 2007-2008 global financial crisis.