Advanced Search
MyIDEAS: Login to save this article or follow this journal

Long-term evolution of the firm value and behavior of business groups: Korean chaebols between weak premium, strong discount, and strong premium

Contents:

Author Info

  • Lee, Keun
  • Kim, Ji Youn
  • Lee, Oonkyu
Registered author(s):

Abstract

This paper analyzes the long-term evolution of the costs and benefits associated with chaebols or diversified business groups in Korea. Chaebol-affiliated firms in Korea have experienced dramatic changes in their costs and benefits along three time periods (1984-1988, 1990-1995, and 2001-2005). They did not suffer a value loss relative to non-affiliated firms in the 1980s, but did so in the 1990s. In the post-crisis period, however, they began to show value gains. To identify the causes of these changes, we examine if chaebol firms prioritize profit stability over profit maximization, overinvest in low-return businesses, cross-subsidize the low-performing affiliates of their group, and possess greater debt capacity, consequently enjoying lower tax burdens. We discover that in the 1980s, chaebol firms generally enjoyed various perks, such as tax breaks, but shied away from excessive investment activities. In the 1990s, their performance worsened because of substantial over-investment, despite several advantages. However, after massive restructuring and sorting out following the 1997 Asian financial crisis, chaebols emerged as very profitable firms correcting over-investment despite the absence of tax perks and debt-carrying advantages.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6WMC-4Y95X68-1/2/a0aa71d44f34f9e21376552668feddb7
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

Volume (Year): 24 (2010)
Issue (Month): 3 (September)
Pages: 412-440

as in new window
Handle: RePEc:eee:jjieco:v:24:y:2010:i:3:p:412-440

Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/622903

Related research

Keywords: Chaebol Business groups Value loss/gain Over-investment Diversification;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Shin, Hyun-Han & Park, Young S., 1999. "Financing constraints and internal capital markets: Evidence from Korean 'chaebols'," Journal of Corporate Finance, Elsevier, Elsevier, vol. 5(2), pages 169-191, June.
  2. Ferris, Stephen P. & Kumar, Raman & Sarin, Atulya, 1995. "The role of corporate groupings in controlling agency conflicts: The case of keiretsu," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 3(2-3), pages 319-335, July.
  3. Choi, Jeong-Pyo & Cowing, Thomas G., 1999. "Firm behavior and group affiliation: The strategic role of corporate grouping for Korean firms," Journal of Asian Economics, Elsevier, Elsevier, vol. 10(2), pages 195-209.
  4. Khanna, Tarun, 2000. "Business groups and social welfare in emerging markets: Existing evidence and unanswered questions," European Economic Review, Elsevier, Elsevier, vol. 44(4-6), pages 748-761, May.
  5. Servaes, Henri, 1996. " The Value of Diversification during the Conglomerate Merger Wave," Journal of Finance, American Finance Association, American Finance Association, vol. 51(4), pages 1201-25, September.
  6. Prowse, Stephen D, 1992. " The Structure of Corporate Ownership in Japan," Journal of Finance, American Finance Association, American Finance Association, vol. 47(3), pages 1121-40, July.
  7. Goto, Akira, 1982. "Business groups in a market economy," European Economic Review, Elsevier, Elsevier, vol. 19(1), pages 53-70.
  8. David E. Weinstein & Yishay Yafeh, 1998. "On the Costs of a Bank-Centered Financial System: Evidence from the Changing Main Bank Relations in Japan," Journal of Finance, American Finance Association, American Finance Association, vol. 53(2), pages 635-672, 04.
  9. Kee-Hong Bae & Jun-Koo Kang & Jin-Mo Kim, 2002. "Tunneling or Value Added? Evidence from Mergers by Korean Business Groups," Journal of Finance, American Finance Association, American Finance Association, vol. 57(6), pages 2695-2740, December.
  10. Kock, Carl J & Guillen, Mauro F, 2001. "Strategy and Structure in Developing Countries: Business Groups as an Evolutionary Response to Opportunities for Unrelated Diversification," Industrial and Corporate Change, Oxford University Press, Oxford University Press, vol. 10(1), pages 77-113, March.
  11. Spiess, D. Katherine & Affleck-Graves, John, 1995. "Underperformance in long-run stock returns following seasoned equity offerings," Journal of Financial Economics, Elsevier, Elsevier, vol. 38(3), pages 243-267, July.
  12. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 82, Board of Governors of the Federal Reserve System (U.S.).
  13. Lewellen, Wilbur G, 1971. "A Pure Financial Rationale for the Conglomerate Merger," Journal of Finance, American Finance Association, American Finance Association, vol. 26(2), pages 521-37, May.
  14. Naveen Khanna, 2001. "The Bright Side of Internal Capital Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 56(4), pages 1489-1528, 08.
  15. Kang, Jun-Koo & Stulz, Rene M, 2000. "Do Banking Shocks Affect Borrowing Firm Performance? An Analysis of the Japanese Experience," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 73(1), pages 1-23, January.
  16. Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2002. "Ferreting Out Tunneling: An Application To Indian Business Groups," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(1), pages 121-148, February.
  17. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, Elsevier, vol. 26(1), pages 3-27, July.
  18. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1990. "The Role of Banks in Reducing the Costs of Financial Distress in Japan," NBER Working Papers 3435, National Bureau of Economic Research, Inc.
  19. Michael L. Lemmon & Karl V. Lins, 2003. "Ownership Structure, Corporate Governance, and Firm Value: Evidence from the East Asian Financial Crisis," Journal of Finance, American Finance Association, American Finance Association, vol. 58(4), pages 1445-1468, 08.
  20. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 1998. "Corporate Ownership Around the World," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1840, Harvard - Institute of Economic Research.
  21. Chang, Sea Jin & Choi, Unghwan, 1988. "Strategy, Structure and Performance of Korean Business Groups: A Transactions Cost Approach," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 37(2), pages 141-58, December.
  22. Berger, Philip G. & Ofek, Eli, 1995. "Diversification's effect on firm value," Journal of Financial Economics, Elsevier, Elsevier, vol. 37(1), pages 39-65, January.
  23. Joh, Sung Wook, 2003. "Corporate governance and firm profitability: evidence from Korea before the economic crisis," Journal of Financial Economics, Elsevier, Elsevier, vol. 68(2), pages 287-322, May.
  24. Tarun Khanna & Krishna Palepu, 2000. "Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups," Journal of Finance, American Finance Association, American Finance Association, vol. 55(2), pages 867-891, 04.
  25. Lee, Keonbeom & Peng, Mike W. & Lee, Keun, 2008. "From diversification premium to diversification discount during institutional transitions," Journal of World Business, Elsevier, Elsevier, vol. 43(1), pages 47-65, January.
  26. Gordon M Phillips & Vojislav Maksimovic, 1999. "Do Conglomerate Firms Allocate Resources Inefficiently?," Working Papers, Center for Economic Studies, U.S. Census Bureau 99-11, Center for Economic Studies, U.S. Census Bureau.
  27. Meyer, Margaret A & Milgrom, Paul & Roberts, Donald John, 1992. "Organizational Prospects, Influence Costs, and Ownership Changes," CEPR Discussion Papers, C.E.P.R. Discussion Papers 665, C.E.P.R. Discussion Papers.
  28. Tarun Khanna & Yishay Yafeh, 2007. "Business Groups in Emerging Markets: Paragons or Parasites?," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 45(2), pages 331-372, June.
  29. Randall Morck & Masao Nakamura, 1999. "Banks and Corporate Control in Japan," Journal of Finance, American Finance Association, American Finance Association, vol. 54(1), pages 319-339, 02.
  30. Hamilton, Gary G & Feenstra, Robert C, 1995. "Varieties of Hierarchies and Markets: An Introduction," Industrial and Corporate Change, Oxford University Press, Oxford University Press, vol. 4(1), pages 51-91.
  31. Karl Lins & Henri Servaes, 1999. "International Evidence on the Value of Corporate Diversification," Journal of Finance, American Finance Association, American Finance Association, vol. 54(6), pages 2215-2239, December.
  32. Leff, Nathaniel H, 1978. "Industrial Organization and Entrepreneurship in the Developing Countries: The Economic Groups," Economic Development and Cultural Change, University of Chicago Press, University of Chicago Press, vol. 26(4), pages 661-75, July.
  33. Ferris, Stephen P. & Kim, Kenneth A. & Kitsabunnarat, Pattanaporn, 2003. "The costs (and benefits?) of diversified business groups: The case of Korean chaebols," Journal of Banking & Finance, Elsevier, Elsevier, vol. 27(2), pages 251-273, February.
  34. Toni M. Whited, 2001. "Is It Inefficient Investment that Causes the Diversification Discount?," Journal of Finance, American Finance Association, American Finance Association, vol. 56(5), pages 1667-1691, October.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Iwasaki, Ichiro, 2014. "Global financial crisis, corporate governance, and firm survival:," Journal of Comparative Economics, Elsevier, vol. 42(1), pages 178-211.
  2. Cheong, Kwang Soo & Choo, Kineung & Lee, Keun, 2010. "Understanding the behavior of business groups: A dynamic model and empirical analysis," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 76(2), pages 141-152, November.
  3. Iwasaki, Ichiro, 2013. "Global Financial Crisis, Corporate Governance, and Firm Survival: The Russian Experience," RRC Working Paper Series, Russian Research Center, Institute of Economic Research, Hitotsubashi University 37, Russian Research Center, Institute of Economic Research, Hitotsubashi University.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:jjieco:v:24:y:2010:i:3:p:412-440. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.