Corporate Structure, Governance and Strategic Decisions

Abstract

After Shleifer and Vishny (1997) introduce agency conflicts between controlling insiders and outside investors, a new research trend has emerged, which focuses on controlling insiders' incentives for opportunistic behavior and assumes that controlling insiders may want more opaque corporate information environment to mask their pursuance of private control benefits. However, there are still open issues on the topic of how different controlling shareholder types, such as business group owners, institutional owners and family owners, each affect corporate information environment. Therefore, this study aims to investigate the different roles of controlling ownership types on corporate informational environment. Chapter 1 examines earnings management behaviors of firms affiliated with business groups, using a unique dataset for South Korean business groups (chaebols) between 1993 and 2007. Contrary to predictions of agency theory, we find that group firms are actually less engaged in earnings management than non-group firms, and we offer controlling family's concern for group reputation as an explanation. Group firms are also shown to use more real cash flow-based earnings management than discretionary accruals management. The results are robust with respect to the method of control sample construction, alternative models and group definitions, and endogeneity. There is also evidence that corporate reforms undertaken in the aftermath of the Asian financial crisis, including regulations on auditing and combined group-wide financial reports, appear to have mitigated the use of earnings management by group firms. These results are consistent with the notion that concerns for group reputation may mitigate agency-based opportunistic earnings management behaviors. Chapter 2 examines whether domestic and foreign institutional investors improve corporate transparency in the presence of controlling benefits. We construct the transparency index, as well as its sub-indices based on firm- and market-level information, using group and non-group firm-level data for South Korea between 2001 and 2007. The results show that foreign institutional ownership improves overall corporate transparency, while the effects of domestic institutional ownership are insignificant. This is traceable to sub-index findings that foreign investors are associated with improvement in both firm-level and market-level transparency, while domestic institutional investors are associated with a decrease in firm-level transparency, but with an increase in market-level transparency, which may offset each other. The effects are non-linear for domestic institutional ownership, while those of foreign institutional ownership remain monotonic. These findings are consistent with the notion that domestic institutional investors are conflicted by their role as monitors to boost transparency and by their desire to pursue control benefits by exploiting insider information and promoting selective transparency. Foreign investors, lacking such controlling benefit opportunities, tend to promote general transparency. Chapter 3 examines how the dynamics between family owners and market participants, such as analysts, market makers and investors determine a firm's overall transparency, using South Korean data between 2001 and 2007. Our results show that family ownership has a positive relation with earning-based transparency, while it has a negative relation with market-based transparency. As a result, family ownership seems to have no impact on overall transparency. However, an analysis based on sorting of family ownership shows that firms with less than 30% family ownership show a positive significant relation to overall transparency, but firms with family ownership of 30% or higher have an insignificant relation with overall transparency. This discrepancy may exist because family owners may want to promote corporate transparency through better earning-based information dissemination, but market participants discount such efforts and this discount increases as family ownership increases.