Long-term evolution of the firm value and behavior of business groups:
Korean chaebols between weak premium, strong discount, and strong
premium
Journal of the Japanese and International Economies, 24 (3):
412-440 (2010)Abstract
This paper analyzes the long-term evolution of the costs and benefits
associated with chaebols or diversified business groups in Korea.
Chaebol-affiliated firms in Korea have experienced dramatic changes
in their costs and benefits along three time periods (1984-1988,
1990-1995, and 2001-2005). They did not suffer a value loss relative
to non-affiliated firms in the 1980s, but did so in the 1990s. In
the post-crisis period, however, they began to show value gains.
To identify the causes of these changes, we examine if chaebol firms
prioritize profit stability over profit maximization, overinvest
in low-return businesses, cross-subsidize the low-performing affiliates
of their group, and possess greater debt capacity, consequently enjoying
lower tax burdens. We discover that in the 1980s, chaebol firms generally
enjoyed various perks, such as tax breaks, but shied away from excessive
investment activities. In the 1990s, their performance worsened because
of substantial over-investment, despite several advantages. However,
after massive restructuring and sorting out following the 1997 Asian
financial crisis, chaebols emerged as very profitable firms correcting
over-investment despite the absence of tax perks and debt-carrying
advantages. © 2010 Elsevier Inc.