Tunneling through Intragroup Transactions: Evidence from Korean Chaebols

This study examines the interaction between the ownership structure and the intragroup transactions of Korean chaebols to test the tunneling hypothesis. Using the data on intragroup transactions (sales, purchases, receivables, and payables) and intragroup ownership between 1999 and 2014, we derive two findings. First, the intragroup transactions of firms with large and/or direct ownership by the controlling family enhance the firms’ performance significantly more than those of firms with small and/or indirect ownership by the family. Second, firms’ performance improves more if the counterparties of the intragroup transactions are firms with smaller and/or more indirect ownership by family and also with counterparty firms that are central to the group. The results are consistent with the tunneling hypothesis and suggest that intragroup transactions are important means of tunneling activities by controlling families.