Simplifying Business Group Structures: Value and Governance Implications for Korean Chaebols

Abstract

We examine Korean business groups' transitions from circular-shareholding to (relatively simple) pyramidal-shareholding structures during 2011-2018. The transition did not impact chaebol families' degrees of control or incentive conflicts in firms belonging to circular-shareholdings ("loops"), yet these firms’ values declined, particularly when they have higher incentive conflicts. Non-loop group firms experienced a value increase (decline) if they had little (significant) agency issues that were difficult to identify under opaque circular-shareholding structures. Firms in transitioning chaebols also experienced an increase in earnings informativeness. Our findings suggest ownership transparency enables investors to more clearly identify agency issues and managerial incentives across group firms.