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





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    • Baek is from the Department of International Business, College of Economics and Business, Hankuk University of Foreign Studies. Kang is from the Department of Finance, Eli Broad College of Business, Michigan State University, and Lee is from the College of Business Administration, Korea University and the Department of Finance and Accounting, Business School, National University of Singapore. We are grateful for useful comments from Charles Hadlock, Florencio Lopez-de-Silanes, Hasung Jang, Joongi Kim, Wei-Lin Liu, Yishay Yafeh, and seminar participants at the 2003 Allied Korean Finance Associations Meetings, the 2004 Asian Finance Association Meetings, the Hitotsubashi Workshop on Corporate Governance in East Asia, the 4th Asian Corporate Governance Conference, and the Singapore Management University. We thank especially two anonymous referees and Robert Stambaugh (the editor) for their insightful comments. Kang and Lee acknowledge financial support from the Asian Institute of Corporate Governance at Korea University and Baek acknowledges financial support from the Hankuk University of Foreign Studies Research Fund of 2006.


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.