Business Groups and Tunneling: Evidence from Private Securities Offerings by Korean Chaebols

http://onlinelibrary.wiley.com.libproxy.smu.edu.sg/doi/10.1111/j.1540-6261.2006.01062.x/abstract

Business Groups and Tunneling: Evidence from Private Securities Offerings by Korean Chaebols

JAE-SEUNG BAEK, JUN-KOO KANG and INMOO LEE*

The Journal of Finance

Volume 61Issue 5pages 2415–2449October 2006

ABSTRACT

We examine whether equity-linked private securities offerings are used as a mechanism for tunneling among firms that belong to a Korean chaebol. We find that chaebol issuers involved in intragroup deals set the offering prices to benefit their controlling shareholders. We also find that chaebol issuers (member acquirers) realize an 8.8% (5.8%) higher (lower) announcement return than do other types of issuers (acquirers) if they sell private securities at a premium to other member firms, and if the controlling shareholders receive positive net gains from equity ownership in issuers and acquirers. These results are consistent with tunneling within business groups.

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