Abstract
This study examines how ownership structure and conflicts of interest
among shareholders under a poor corporate governance system affected
firm performance before the crisis. Using 5,829 Korean firms subject
to outside auditing during 1993-1997, the paper finds that firms
with low ownership concentration show low firm profitability, controlling
for firm and industry characteristics. Controlling shareholders expropriated
firm resources even when their ownership concentration was small.
Firms with a high disparity between control rights and ownership
rights showed low profitability. When a business group transferred
resources from a subsidiary to another, they were often wasted, suggesting
that "tunneling" occurred. In addition, the negative effects of control-ownership
disparity and internal capital market inefficiency were stronger
in publicly traded firms than in privately held ones. © 2003 Elsevier
Science B.V. All rights reserved.
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