Tunneling or Value Addition? Evidence from Mergers by Korean Business Groups

56 Pages Posted: 14 Nov 2000

See all articles by Kee-Hong Bae

Kee-Hong Bae

York University - Schulich School of Business

Jun-Koo Kang

Nanyang Business School, Nanyang Technological University

Jin-Mo Kim

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: October 2000

Abstract

Business groups in emerging markets have the potential to create either value or agency problems. Using Korean mergers, we investigate the nature of business groups in emerging markets and examine whether Korean business groups (chaebols) add value to their member firms or provide the controlling shareholders with an opportunity for wealth transfer (tunneling). We show that chaebol-affiliated firms that performed well prior to the merger realize significantly negative announcement returns. We also find that chaebol bidders who acquired poorly performing targets within the same group and/or had concentrated equity ownership by owner-managers experience significantly negative abnormal returns. These types of mergers, however, have a significantly positive effect on the market value of the portfolio of other firms in the group. Our results support the tunneling view that firms belonging to business groups pay less attention to the maximization of individual firm value and make takeover decisions that are beneficial to only controlling shareholders.

JEL Classification: G32, G34

Suggested Citation

Bae, Kee-Hong and Kang, Jun-Koo and Kim, Jin-Mo, Tunneling or Value Addition? Evidence from Mergers by Korean Business Groups (October 2000). Available at SSRN: https://ssrn.com/abstract=246621 or http://dx.doi.org/10.2139/ssrn.246621

Kee-Hong Bae (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext) 20248 (Phone)
416-736-5687 (Fax)

Jun-Koo Kang

Nanyang Business School, Nanyang Technological University ( email )

Nanyang Avenue, Block S3-01b-54
Singapore, 639798
Singapore
(+65) 6790-5662 (Phone)
(+65) 6791-3697 (Fax)

HOME PAGE: http://www.nbs.ntu.edu.sg/nbs_corporate/divisions/bnf/index.asp

Jin-Mo Kim

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Janice H. Levin Bldg., Room 121
94 Rockafeller Road
Piscataway, NJ 08854-8054
United States

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