Intragroup Propping: Evidence from the Stock-Price Effects of Earnings Announcements by Korean Business Groups
Gil S. Bae Korea University
Youngsoon S. Cheon Chungang University
Jun-Koo Kang Nanyang Technological University and Michigan State University
Address correspondence to Jun-Koo Kang, Division of Banking and Finance, Nanyang Business School, Nanyang Technological University, Nanyang Avenue, Singapore 639798; telephone:(517) 353-3065; fax: (517) 432-1080; e-mail: email@example.com.
Using earnings announcement events made by firms belonging to Korean chaebols, we examine propping within a chaebol. Consistent with the market’s ex ante valuation of intragroup propping, we find that the announcement of increased (decreased) earnings by a chaebol-affiliated firm has a positive (negative) effect on the market value of other nonannouncing affiliates. The sensitivity of the change in the market value of nonannouncing affiliates to abnormal returns for the announcing firms is higher if the cash flow right of the announcing firm’s controlling shareholder is higher. The sensitivity is also higher if the announcing firm is larger, performs well, and has a higher debt guarantee ratio.