Daniel Wolfenzon

The structure and formation of business groups: Evidence from Korean chaebols

Coauthor(s): Heitor Almeida, Sang Yong Park, Marti G. Subrahmanyam.

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Abstract:
In this paper we study the determinants of business groups’ ownership structure using unique panel data on Korean chaebols. In particular, we attempt to understand how groups form over time. We find that chaebols grow vertically (that is, pyramidally) as the family uses well-established group firms (“central firms”) to set up and acquire firms that have low pledgeable income (e.g., low profitability) and high acquisition premia. Chaebols grow horizontally (that is, using direct family ownership) when the family acquires firms that have high pledgeable income and low acquisition premia. We also examine the relative valuation of chaebol firms. We find that the group’s central firms trade at a discount relative to other public group firms, and present evidence that suggests that this valuation discount is due to shareholders’ anticipation of value-destroying pyramidal acquisitions by the central firms. Our evidence is consistent with the selection of firms into different positions in the chaebol. The evidence also suggests that the (previously documented) underperformance of pyramidal firms could be due to a selection effect (e.g., the family places low profitability firms in pyramids) and not to tunneling.

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