Tunneling or Value Added? Evidence from Mergers by Korean Business Groups


  • Kee-Hong Bae,

  • Jun-Koo Kang,

  • Jin-Mo Kim

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    • Bae is from the College of Business Administration, Korea University, and Kang and Kim are from the Eli Broad College of Business, Michigan State University. We are grateful for comments from Ted Fee, Vidhan Goyal, Hasung Jang, Naveen Khanna, Soo Young Kwon, Inmoo Lee, David Mayers, Kyung Suh Park, Sang-Soo Park, seminar participants at the Korea University and the University of California (Riverside), and session participants at the 1999 Korean Finance Association meeting, the 2001 PACAP Finance Conference, and the 2001 Asian Corporate Governance Conference. We thank especially an anonymous referee, Richard Green (the editor), and René Stulz for their insightful and constructive comments. The paper was completed while the first author was at the Hong Kong University of Science and Technology. Bae acknowledges financial support from the Hong Kong Government's RGC grant (No. HKUST6012/99H), and Kang acknowledges financial support from the Korea University. All errors are our own.


We examine whether firms belonging to Korean business groups (chaebols) benefit from acquisitions they make or whether such acquisitions provide a way for controlling shareholders to increase their wealth by increasing the value of other group firms (tunneling). We find that when a chaebol-affiliated firm makes an acquisition, its stock price on average falls. While minority shareholders of a chaebol-affiliated firm making an acquisition lose, the controlling shareholder of that firm on average benefits because the acquisition enhances the value of other firms in the group. This evidence is consistent with the tunneling hypothesis.