IDEAS home Printed from https://ideas.repec.org/a/eee/corfin/v41y2016icp23-42.html
   My bibliography  Save this article

When heirs become major shareholders: Evidence on pyramiding financed by related-party sales

Author

Listed:
  • Hwang, Sunwoo
  • Kim, Woochan

Abstract

This study investigates how related-party sales are used as a means to financially support the firms in which heirs become major shareholders and allow them to strengthen control over other firms in the group through pyramiding. From a universe of Korean chaebol firms during 2000–2011, we identify a subset of firms where heirs become major shareholders (treatment group) and compare them against their propensity-score-matched firms (control group) before and after the ownership change. A series of difference-in-differences tests with firm fixed effects reveal that treatment group firms experience greater related-party sales, benefit from them in terms of earnings, and gain importance in controlling other firms in the group. However, we do not find these results when non-heirs (e.g., controlling shareholders and other relatives) become major shareholders.

Suggested Citation

  • Hwang, Sunwoo & Kim, Woochan, 2016. "When heirs become major shareholders: Evidence on pyramiding financed by related-party sales," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 23-42.
    • Handle: RePEc:eee:corfin:v:41:y:2016:i:c:p:23-42
    DOI: 10.1016/j.jcorpfin.2016.08.013
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0929119916301092
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jcorpfin.2016.08.013?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Mehrotra, Vikas & Morck, Randall & Shim, Jungwook & Wiwattanakantang, Yupana, 2013. "Adoptive expectations: Rising sons in Japanese family firms," Journal of Financial Economics, Elsevier, vol. 108(3), pages 840-854.
    2. Andres, Christian, 2008. "Large shareholders and firm performance--An empirical examination of founding-family ownership," Journal of Corporate Finance, Elsevier, vol. 14(4), pages 431-445, September.
    3. Andrew Ellul & Marco Pagano & Fausto Panunzi, 2010. "Inheritance Law and Investment in Family Firms," American Economic Review, American Economic Association, vol. 100(5), pages 2414-2450, December.
    4. Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2002. "Ferreting out Tunneling: An Application to Indian Business Groups," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 121-148.
    5. Gopalan, Radhakrishnan & Nanda, Vikram & Seru, Amit, 2007. "Affiliated firms and financial support: Evidence from Indian business groups," Journal of Financial Economics, Elsevier, vol. 86(3), pages 759-795, December.
    6. Tarun Khanna & Yishay Yafeh, 2007. "Business Groups in Emerging Markets: Paragons or Parasites?," Journal of Economic Literature, American Economic Association, vol. 45(2), pages 331-372, June.
    7. Jae‐Seung Baek & Jun‐Koo Kang & Inmoo Lee, 2006. "Business Groups and Tunneling: Evidence from Private Securities Offerings by Korean Chaebols," Journal of Finance, American Finance Association, vol. 61(5), pages 2415-2449, October.
    8. Kim, Woochan & Lim, Youngjae & Sung, Taeyoon, 2007. "Group control motive as a determinant of ownership structure in business conglomerates: Evidence from Korea's chaebols," Pacific-Basin Finance Journal, Elsevier, vol. 15(3), pages 213-252, June.
    9. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
    10. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation," Scholarly Articles 29407535, Harvard University Department of Economics.
    11. Jean Helwege & Christo Pirinsky & René M. Stulz, 2007. "Why Do Firms Become Widely Held? An Analysis of the Dynamics of Corporate Ownership," Journal of Finance, American Finance Association, vol. 62(3), pages 995-1028, June.
    12. Almeida, Heitor & Park, Sang Yong & Subrahmanyam, Marti G. & Wolfenzon, Daniel, 2011. "The structure and formation of business groups: Evidence from Korean chaebols," Journal of Financial Economics, Elsevier, vol. 99(2), pages 447-475, February.
    13. repec:bla:jfinan:v:58:y:2003:i:3:p:1301-1327 is not listed on IDEAS
    14. Bertrand, Marianne & Johnson, Simon & Samphantharak, Krislert & Schoar, Antoinette, 2008. "Mixing family with business: A study of Thai business groups and the families behind them," Journal of Financial Economics, Elsevier, vol. 88(3), pages 466-498, June.
    15. Atanasov, Vladimir & Black, Bernard, 2016. "Shock-Based Causal Inference in Corporate Finance and Accounting Research," Critical Finance Review, now publishers, vol. 5(2), pages 207-304, December.
    16. Maury, Benjamin, 2006. "Family ownership and firm performance: Empirical evidence from Western European corporations," Journal of Corporate Finance, Elsevier, vol. 12(2), pages 321-341, January.
    17. Black, Bernard S. & Kim, Woochan & Jang, Hasung & Park, Kyung-Suh, 2015. "How corporate governance affect firm value? Evidence on a self-dealing channel from a natural experiment in Korea," Journal of Banking & Finance, Elsevier, vol. 51(C), pages 131-150.
    18. Belén Villalonga & Raphael Amit, 2009. "How Are U.S. Family Firms Controlled?," The Review of Financial Studies, Society for Financial Studies, vol. 22(8), pages 3047-3091, August.
    19. Kee‐Hong Bae & Jun‐Koo Kang & Jin‐Mo Kim, 2002. "Tunneling or Value Added? Evidence from Mergers by Korean Business Groups," Journal of Finance, American Finance Association, vol. 57(6), pages 2695-2740, December.
    20. Margarita Tsoutsoura, 2015. "The Effect of Succession Taxes on Family Firm Investment: Evidence from a Natural Experiment," Journal of Finance, American Finance Association, vol. 70(2), pages 649-688, April.
    21. Buchuk, David & Larrain, Borja & Muñoz, Francisco & Urzúa I., Francisco, 2014. "The internal capital markets of business groups: Evidence from intra-group loans," Journal of Financial Economics, Elsevier, vol. 112(2), pages 190-212.
    22. Cheung, Yan-Leung & Rau, P. Raghavendra & Stouraitis, Aris, 2006. "Tunneling, propping, and expropriation: evidence from connected party transactions in Hong Kong," Journal of Financial Economics, Elsevier, vol. 82(2), pages 343-386, November.
    23. Smith, Brian F. & Amoako-Adu, Ben, 1999. "Management succession and financial performance of family controlled firms," Journal of Corporate Finance, Elsevier, vol. 5(4), pages 341-368, December.
    24. Ronald C. Anderson & David M. Reeb, 2003. "Founding‐Family Ownership and Firm Performance: Evidence from the S&P 500," Journal of Finance, American Finance Association, vol. 58(3), pages 1301-1328, June.
    25. David H. Autor, 2003. "Outsourcing at Will: The Contribution of Unjust Dismissal Doctrine to the Growth of Employment Outsourcing," Journal of Labor Economics, University of Chicago Press, vol. 21(1), pages 1-42, January.
    26. Cucculelli, Marco & Micucci, Giacinto, 2008. "Family succession and firm performance: Evidence from Italian family firms," Journal of Corporate Finance, Elsevier, vol. 14(1), pages 17-31, February.
    27. Morten Bennedsen & Kasper Meisner Nielsen & Francisco Perez-Gonzalez & Daniel Wolfenzon, 2007. "Inside the Family Firm: The Role of Families in Succession Decisions and Performance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(2), pages 647-691.
    28. Radhakrishnan Gopalan & Vikram Nanda & Amit Seru, 2014. "Internal Capital Market and Dividend Policies: Evidence From Business Groups," The Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 1102-1142.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ducret, Romain & Isakov, Dušan, 2020. "The Korea discount and chaebols," Pacific-Basin Finance Journal, Elsevier, vol. 63(C).
    2. Gull, Ammar Ali & Nekhili, Mehdi & Nagati, Haithem & Chtioui, Tawhid, 2018. "Beyond gender diversity: How specific attributes of female directors affect earnings management," The British Accounting Review, Elsevier, vol. 50(3), pages 255-274.
    3. Falavigna, G. & Giannini, V. & Ippoliti, R., 2024. "Internationalization and financial constraints: Opportunities, obstacles, and strategies," International Economics, Elsevier, vol. 179(C).
    4. Avijit Bansal & Balagopal Gopalakrishnan & Joshy Jacob & Pranjal Srivastava, 2022. "Impact of operational fragility on stock returns: Lessons from COVID‐19 crisis," International Review of Finance, International Review of Finance Ltd., vol. 22(2), pages 365-398, June.
    5. Lina Mao & Guangfan Sun & Yining He & Shanshan Zheng & Changwei Guo, 2024. "Regional cultural inclusiveness and firm performance in China," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-14, December.
    6. Gosain, Neha & Kashiramka, Smita & Chaudhry, Neeru, 2025. "Signaling vs. agency theory: What drives dividends of promoter-owned firms during a crisis?," Research in International Business and Finance, Elsevier, vol. 73(PA).
    7. Lee, Sangwon, 2022. "Internal capital markets, corporate investment, and the COVID-19 pandemic: Evidence from Korean business groups," International Review of Financial Analysis, Elsevier, vol. 80(C).
    8. Hafezali Iqbal Hussain & Azlan Ali & Hassanudin Mohd Thas Thaker & Mohsin Ali, 2019. "Firm Performance and Family Related Directors: Empirical Evidence from an Emerging Market," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 13(2), June.
    9. Shah, Muhammad Hashim & Xiao, Zuoping & Abdullah,, 2023. "Internal pyramid structure, judicial efficiency, firm-level governance and dividend policy," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 764-785.
    10. Kim, Sojung & Kim, Woochan, 2022. "Tunneling through trademarks," Journal of Corporate Finance, Elsevier, vol. 76(C).
    11. Abdul Rasheed P C & T. Mallikarjunappa & K.T. Thomachan, 2019. "Promoter Ownership, Related Party Transactions and Firm Performance: A Study Among Selected Companies in India," FIIB Business Review, , vol. 8(3), pages 205-217, September.
    12. Hyungseok Kim & Woochan Kim, 2020. "Does tunneling explain the sensitivity of executive compensation to other member firms’ performance?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(9-10), pages 1268-1289, October.
    13. Liu, Yunxiao & Kim, Woochan & Sung, Taeyoon, 2021. "Investment efficiency of firms outside the business group," Journal of Corporate Finance, Elsevier, vol. 71(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hwang, Sunwoo & Kim, Woochan, 2014. "When Heirs Become Major Shareholders: Evidence on Tunneling and Succession through Related-Party Transactions," MPRA Paper 56487, University Library of Munich, Germany.
    2. Sumon Kumar Bhaumik & Andros Gregoriou, 2010. "‘Family’ Ownership, Tunnelling And Earnings Management: A Review Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 24(4), pages 705-730, September.
    3. Liu, Yunxiao & Kim, Woochan & Sung, Taeyoon, 2021. "Investment efficiency of firms outside the business group," Journal of Corporate Finance, Elsevier, vol. 71(C).
    4. Gam, Yong Kyu & Kang, Min Jung & Park, Junho & Shin, Hojong, 2020. "How inheritance law affects family firm performance: Evidence from a natural experiment," Pacific-Basin Finance Journal, Elsevier, vol. 59(C).
    5. Luis Alfonso Dau & Randall Morck & Bernard Yin Yeung, 2021. "Business groups and the study of international business: A Coasean synthesis and extension," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 52(2), pages 161-211, March.
    6. Cheng, Liubing & Chen, Yanyan & Zhang, Yan, 2022. "Business groups and corporate bond costs: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).
    7. Kang, Hyung Cheol & Anderson, Robert M. & Eom, Kyong Shik & Kang, Sang Koo, 2017. "Controlling shareholders' value, long-run firm value and short-term performance," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 340-353.
    8. González, Maximiliano & Guzmán, Alexander & Pombo, Carlos & Trujillo, María-Andrea, 2012. "Family firms and financial performance: The cost of growing," Emerging Markets Review, Elsevier, vol. 13(4), pages 626-649.
    9. Chi, Yung-Ling, 2023. "The agency costs of family ownership: Evidence from innovation performance," Journal of Banking & Finance, Elsevier, vol. 148(C).
    10. Torres, Juan Pablo & Jara Bertín, Mauricio & López-Iturriaga, Félix J., 2017. "Corporate control and firm value: The bright side of business groups," Journal of Family Business Strategy, Elsevier, vol. 8(2), pages 99-108.
    11. Buchuk, David & Larrain, Borja & Muñoz, Francisco & Urzúa I., Francisco, 2014. "The internal capital markets of business groups: Evidence from intra-group loans," Journal of Financial Economics, Elsevier, vol. 112(2), pages 190-212.
    12. Fuxiu Jiang & Xiaojia Zheng & Wei Tang, 2018. "Non-family chair and corporate performance," Frontiers of Business Research in China, Springer, vol. 12(1), pages 1-30, December.
    13. Hegde, Shantaram & Seth, Rama & Vishwanatha, S.R., 2020. "Ownership concentration and stock returns: Evidence from family firms in India," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    14. Randall Morck, 2011. "Finance and Governance in Developing Economies," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 375-406, December.
    15. Ronald W. Masulis & Peter K. Pham & Jason Zein, 2020. "Family Business Group Expansion Through IPOs: The Role of Internal Capital Markets in Financing Growth While Preserving Control," Management Science, INFORMS, vol. 66(11), pages 5191-5215, November.
    16. Suveera Gill & Parmjit Kaur, 2015. "Family Involvement in Business and Financial Performance: A Panel Data Analysis," Vikalpa: The Journal for Decision Makers, , vol. 40(4), pages 395-420, December.
    17. Viswanathan Nagarajan & Pitabas Mohanty & Apalak Khatua, 2023. "Financing effects of corporate diversification: A review," Review of Managerial Science, Springer, vol. 17(7), pages 2555-2585, October.
    18. repec:dau:papers:123456789/5922 is not listed on IDEAS
    19. Khosa,Amrinder & Ahmed,Kamran & Henry,Darren, 2019. "Ownership Structure, Related Party Transactions, and Firm Valuation," Cambridge Books, Cambridge University Press, number 9781108492195, January.
    20. Byun, Hae-Young & Choi, Sunhwa & Hwang, Lee-Seok & Kim, Robert G., 2013. "Business group affiliation, ownership structure, and the cost of debt," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 311-331.
    21. Bae, Kee-Hong & Kim, Seung-Bo & Kim, Woochan, 2012. "Family control and expropriation at not-for-profit organizations: evidence from korean private universities," MPRA Paper 44029, University Library of Munich, Germany.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:corfin:v:41:y:2016:i:c:p:23-42. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jcorpfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.