he Innovation Effects of Vertical Spinoffs: Reconciling Minority Shareholder Protection and Innovation Policy under Korea’s Revised Commercial Act

This paper examines the trade-off between minority shareholder protection and innovation-driven specialization created by South Korea’s regulation of vertical spin-offs (muljeok bunhal) — a wholly-owned daughter firm structure at the center of Commercial Act reforms since 2022, which critics warn may suppress a legitimate channel for technological specialization in the name of shareholder protection. Using 206 spin-offs disclosed on DART between 2016 and 2024, I construct firm-quarter measures of patent-based technological value (following Kogan et al., 2017) and input-output-based industry heterogeneity between parent and daughter (following Antras and Chor, 2013. An event-study difference-in-differences design shows spin-off announcements are associated with a 4.2 percentage point abnormal decline in parent stock returns — significant only once industry heterogeneity is controlled for. Daughter firms spun off into more dissimilar industries create substantially more technological value (a one-standard-deviation increase in heterogeneity raises it by 36.8 percentage points), and parent firms show a symmetric reversal from technological value destruction to value creation as heterogeneity rises. A cost-benefit simulation combining these estimates finds that expected innovation gains exceed estimated shareholder losses in 201 of 206 cases — a result that depends critically on accounting for industry heterogeneity and would reverse sharply if heterogeneity were ignored.