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Intragroup Transactions, Corporate Governance, and Corporate Philanthropy in Korean Business Groups

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Abstract

This study examines how the corporate philanthropy decisions of group-affiliated firms in Korea (Chaebol firms) are made. Based on the attention-based view, we argue that when corporate decision makers at group-affiliated firms focus their attention more (less) on internal markets than external stakeholders because of the firm’s high (low) reliance on intragroup transactions, the firm will decrease (increase) its level of corporate philanthropy. We further argue that the relationship will be stronger when governance mechanisms focus on the instrumental value of corporate philanthropy. Using a panel sample of group-affiliated firms in Korea from 2011 to 2015, we find that as intragroup sales increase, the level of corporate philanthropy decreases, and such a negative relationship is stronger when outside director representation and foreign investor ownership are high. Our study suggests that internal dependence and corporate governance mechanisms jointly affect the level of corporate philanthropy at firms in a business group. Thus, this study contributes to the literature on corporate philanthropy, business group, and corporate governance.

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Notes

  1. In business groups, historically, strategic decisions at each affiliated firm have been made by both top executives at affiliated firms and a group-level governing committees or coordination teams. However, after the Asian Financial Crisis in the late 1990s, “The Korean government prohibited [group-level staff organization] because Chaebols were believed to be one of the major culprits of the crisis...These staff organizations were transferred to major affiliates” (Chang 2003a, pp. 102–103). Nonetheless, it is more appropriate to assume that corporate decision makers at affiliated firms make important decisions in accordance with coordination at the group level.

  2. Chaebol affiliates are traditionally defined as those “either more than 30% of whose issued shares are owned by one person, his relatives, or a company controlled by him, or whose management such as appointing its officers is substantially affected” (Chang 2003a, p. 10). “Chaebol” has often been used interchangeably with “business group” in much of the research on Korean firms. As such, this paper also uses the terms “Chaebol” and “business group” interchangeably.

  3. We address the potential effect that controlling shareholders’ interests may have on corporate philanthropy (i.e., the agency theory argument) empirically by controlling for founding family ownership at each affiliated firm.

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Acknowledgements

We thank Special Issue Editors and two anonymous reviewers for their valuable insights in the review process. This work was supported by the Sogang University Research Grant of 201710114.01.

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Correspondence to Jeongil Seo.

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See Table 4.

Table 4 Business groups in Korea in 2015

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Oh, WY., Chang, Y.K., Lee, G. et al. Intragroup Transactions, Corporate Governance, and Corporate Philanthropy in Korean Business Groups. J Bus Ethics 153, 1031–1049 (2018). https://doi.org/10.1007/s10551-018-3913-3

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