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Private benefits of control and firm leverage: An analysis of Korean firms

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  • Jangkoo Kang
  • Joon-Seok Kim

Abstract

This paper investigates the leverage choices of an entrenched controlling party. If debt effectively curbs the private benefits of control, the controlling shareholder is given incentives to avoid debt. Using estimates of the private benefits of control and financial statement data from selected Korean firms, we find that a controlling party with large private benefits tends to lower debt. This relationship was concentrated after the Asian financial crisis. However, before the crisis, firms that affiliated with Korean conglomerates, chaebols, used more debt as private benefits increased. A financial reform program triggered by the crisis seems to have actuated the disciplining role of debt. Copyright Springer Science + Business Media, LLC 2006

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  • Jangkoo Kang & Joon-Seok Kim, 2006. "Private benefits of control and firm leverage: An analysis of Korean firms," Review of Quantitative Finance and Accounting, Springer, vol. 27(4), pages 439-463, December.
    • Handle: RePEc:kap:rqfnac:v:27:y:2006:i:4:p:439-463
    DOI: 10.1007/s11156-006-0046-z
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    Cited by:

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    2. Youngdeok Lim, 2012. "Tax avoidance and underleverage puzzle: Korean evidence," Review of Quantitative Finance and Accounting, Springer, vol. 39(3), pages 333-360, October.
    3. de La Bruslerie, Hubert & Gueguen, Simon, 2021. "Creditors’ holdup, releveraging and the setting of private appropriation in a control contract between shareholders," International Review of Law and Economics, Elsevier, vol. 68(C).
    4. Liu-Ching Tsai & Chaur-Shiuh Young & Hui-Wen Hsu, 2011. "Entrenched controlling shareholders and the performance consequences of corporate diversification in Taiwan," Review of Quantitative Finance and Accounting, Springer, vol. 37(1), pages 105-126, July.
    5. Özgür Arslan-Ayaydin & Chris Florackis & Aydin Ozkan, 2014. "Financial flexibility, corporate investment and performance: evidence from financial crises," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 211-250, February.
    6. Lucy Lim, 2016. "Dual-class versus single-class firms: information asymmetry," Review of Quantitative Finance and Accounting, Springer, vol. 46(4), pages 763-791, May.
    7. Doocheol Moon & Kishore Tandon, 2007. "The influence of growth opportunities on the relationship between equity ownership and leverage," Review of Quantitative Finance and Accounting, Springer, vol. 29(4), pages 339-351, November.
    8. de La Bruslerie, Hubert, 2016. "Does debt curb controlling shareholders' private benefits? Modelling in a contingent claim framework," Economic Modelling, Elsevier, vol. 58(C), pages 263-282.
    9. Lee, Kyounghun & Oh, Frederick Dongchuhl, 2022. "Mandatory disclosure, investment, and private benefits of control," Economics Letters, Elsevier, vol. 216(C).

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