The Value-relevance of Earnings and Book Value, Ownership Structure, and Business Group Affiliation: Evidence From Korean Business Groups

Authors

  • Kee-Hong Bae,

    1. The authors are respectively from the Queen's School of Business, Queen's University and Korea University Business School.
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  • Seok Woo Jeong

    Corresponding author
    1. The authors are respectively from the Queen's School of Business, Queen's University and Korea University Business School.
      * Address for correspondence: Seok Woo Jeong, Professor of Accounting, Korea University Business School, 5-1 Anam-dong, Sungbuk-ku, Seoul, 136-701, Korea.
      e-mail: jeong@korea.ac.kr
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  • They are grateful for comments from the anonymous referee, Andrew Stark (editor), and session participants at the 2001 Korean Securities Association meeting and 2003 AAA meeting at Hawaii. They also thank seminar participants at the State University of New York at Buffalo, and Peter Cammad for technical edit of the paper. All remaining errors are the authors' own.

* Address for correspondence: Seok Woo Jeong, Professor of Accounting, Korea University Business School, 5-1 Anam-dong, Sungbuk-ku, Seoul, 136-701, Korea.
e-mail: jeong@korea.ac.kr

Abstract

Abstract:  We investigate the quality of two primary accounting summary measures, i.e., earnings and book value, provided by firms belonging to Korean business groups (chaebols). We find that the value-relevance of earnings and book value is significantly smaller for firms affiliated with business groups. We also find that cross-equity ownership (a proxy for the agency problem between controlling and minority shareholders) negatively affects value-relevance, while foreign equity ownership (a proxy for the monitoring effect) positively affects value-relevance. This evidence is consistent with the view that the poor quality of earnings and book value provided by chaebol-affiliated firms is due to the inherently poor governance structure of chaebols.

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