Whither the Korean Business Groups under Family Control

초록

Korean business groups have been under family control for decades. The controlling family’s ultimate ownership share, however, is not that large. It is 8.2 percent in December 1997 on average in the five largest business groups. Given the concentration of control rights and their separation from cash flow rights, it should not be surprising that their ratio of debt to outside equity is as high as 7.61 on average. As the controlling family could freely expropriate shareholders, it must have been costly to finance investments by selling cash flow rights. In the years 1998 and 1999 the ratio of debt to equity dropped to 2.30 on average in four of the five business groups. It is attributable in part to the new rules the state prescribed to improve corporate governance after the economic crisis of 1997. Although the ownership structure has little changed, the new rules seem to have lowered the agency cost of outside equity by making it difficult for the controlling family to expropriate shareholders.