Evolution of the Costs and Benefits of Business Groups
Evolution of the costs and benefits of business groups:
Korean chaebols with pre-crisis discount and post-crisis premium Keun Lee,*, Ji Youn Kim a, Oonkyu Leeb a b
School of Economics, Seoul National University, Seoul Korea
Techno-Economics and Policy Program(TEPP), Seoul National University, Seoul, Korea
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Abstract
We examine Korean chaebols to analyze the long term evolution of the costs and benefits associated with a diversified business group. We find that Korean chaebol-affiliated firms have shown some dramatic changes in the costs and benefits along the three time periods (1984-1988, 1990-1995, and 2001-2003). Korean chaebol-affiliated firms did not suffer a value loss relative to non-affiliated firms in the 1980s and did so in the 1990s, but in the post-crisis period, they are rather experiencing value gains. Chaebol-affiliated firms’ value loss/gains hold even after controlling for the relatedness of the diversification present within the chaebol. To identify the causes of this dramatic changes, we checks whether chaebol firms: (1) pursue profit stability rather than profit maximization, (2) over-invest in low performing industries, (3) cross-subsidize the weaker members of their group, and (4) possess greater debt capacity and consequently enjoy lower tax burdens. Overall, in the 1980s chaebol firms has enjoyed various advantages including taxes but did not invest much excessively, but in the 1990s their performance decreased due to substantial over-investment, despite several advantages still holding. Now, after restructuring after the financial crisis, they (survived chaebols) have emerged as very profitable firms with less over-investment despite no longer tax advantages which show that they have become more transparent than before.
JEL classification: G32; G34
Keywords: Chaebol; Business groups; Value loss/gain
Korean chaebols with pre-crisis discount and post-crisis premium Keun Lee,*, Ji Youn Kim a, Oonkyu Leeb a b
School of Economics, Seoul National University, Seoul Korea
Techno-Economics and Policy Program(TEPP), Seoul National University, Seoul, Korea
___________________________________________________________________________
Abstract
We examine Korean chaebols to analyze the long term evolution of the costs and benefits associated with a diversified business group. We find that Korean chaebol-affiliated firms have shown some dramatic changes in the costs and benefits along the three time periods (1984-1988, 1990-1995, and 2001-2003). Korean chaebol-affiliated firms did not suffer a value loss relative to non-affiliated firms in the 1980s and did so in the 1990s, but in the post-crisis period, they are rather experiencing value gains. Chaebol-affiliated firms’ value loss/gains hold even after controlling for the relatedness of the diversification present within the chaebol. To identify the causes of this dramatic changes, we checks whether chaebol firms: (1) pursue profit stability rather than profit maximization, (2) over-invest in low performing industries, (3) cross-subsidize the weaker members of their group, and (4) possess greater debt capacity and consequently enjoy lower tax burdens. Overall, in the 1980s chaebol firms has enjoyed various advantages including taxes but did not invest much excessively, but in the 1990s their performance decreased due to substantial over-investment, despite several advantages still holding. Now, after restructuring after the financial crisis, they (survived chaebols) have emerged as very profitable firms with less over-investment despite no longer tax advantages which show that they have become more transparent than before.
JEL classification: G32; G34
Keywords: Chaebol; Business groups; Value loss/gain