Business Groups and the Value Implications of Ownership Transparency

Abstract

We examine Korean business groups firms’ transitions from circular-shareholding to pyramidal shareholding structures between 2011-2019. With the removal of circular-shareholdings, neither the chaebol families’ degree of control of group firms nor the separation between their cash flow and ownership rights changed. Nevertheless, the removal of circular-shareholdings corresponded to a 10% decline in Tobin’s Q and market returns relative to other group firms. This relative value decline is not explained by an increase in observed expropriation or erosion of access to internal capital markets. Instead, our evidence is consistent with shareholding transparency allowing investors to better identify agency issues among business group firms.