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The Impact of the Ownership Discrepancy Between Cash-Flow Rights and Voting Rights on Firms’ Soft Asset Investment Decisions: Evidence from Large Business Groups in South Korea

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Abstract

This study investigates the impact of the ownership discrepancy between cash flow rights and voting rights on firms’ soft asset investment decisions in large business groups in South Korea. We find a negative association between the ownership discrepancy and the level of investments in intangibles and human resources. Our finding implies that when controlling (or ultimate) shareholders have higher voting rights than their cash flow rights, they have more incentives to reduce firms’ investments that are essential for business success in long-term strategic perspectives, exploiting minority shareholders’ rights. In addition, we find that the negative association is more pronounced for firms with a higher level of free cash flows and that the negative association becomes less significant or insignificant in the period after the Internal Accounting Control System Legislation.

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Notes

  1. We use the term ‘controlling shareholders’ and ‘ultimate shareholders’ interchangeably in this paper.

  2. See quoted news articles in Sect. 2.3 of this paper.

  3. A large Korean business group is often referred to as a ‘Chaebol’ in other literature.

  4. Due to lack of analytical models and empirical evidences on this issue, we instead searched anecdotal evidences from media in South Korea.

  5. Per U.S. GAAP, all internally generated intangibles are required to be expensed. In other words, they are to be recognized as expenses in the income statement and cannot be capitalized.

  6. Until the adoption of International Financial Reporting Standards (IFRS) in the year 2011, the domestic accounting standards (referred to as the Statements of Korean Accounting Standards) were applied to companies listed on Korea Exchange for financial reporting purpose in South Korea.

  7. Our main results are consistent when R&D expenditures are scaled by net sales instead of total assets.

  8. These formulae are slightly different from those by which OPNI calculates cash flow right and voting right. Such variation resulted from the unavailability of one piece of information, the percentage of shares reciprocally acquired, after 2008. Reciprocally acquiring shares of a counterpart is forbidden by the regulation of South Korea. Thus, the significance of that information is fairly small and insignificant, if at all, because a company should dispose of it in the near term.

  9. Korea Exchange (KRX) was established in 2005 as merger of Korea Stock Exchange (KSE), Korea Futures Exchange, and Korea Securities Dealers Automated Quotation (KOSDAQ) Stock Market. KRX’s headquarters are in Busan and the office for cash markets and market oversight is located in Seoul, South Korea.

    The Korea Stock Exchange (KSE) is created in 1956 and reorganized into a government-run, non-profit corporation in 1963. In 1983 it introduced the KOSPI (Korea Stock Price Index) Stock Market with the base value of 100 (January 4, 1980 = 100). In 1988, the KSE privatized and incorporated into a membership organization. The KSE began to publish the KOSPI 200 (Korea Stock Price Index 200) from 1994. The KOSPI 200 index consists of 200 large companies traded on the Stock Market Division of the KSE. In 1996, the KOSDAQ Stock Market that had been benchmarked from NASDAQ in the U.S. was established. In 2005, the year of the incorporation of the KRX, the KRX started publishing the KRX 100 (Korea Exchange 100 Index). KRX 100 is the index of 100 companies listed on the KRX which includes big KOSDAQ companies. In addition, the KRX launched the KONEX (Korea New Exchange) market in 2013. From 1992, the KSE allowed foreign direct investments, and in 2007 it listed foreign companies for the first time.

  10. The Fair Trade Commission a governmental organization under the authority of the Prime Minister; it was established to facilitate unimpeded competition in the market and to enhance customers’ rights.

  11. High debt-to-equity ratio was one of the problems that the government of South Korea wanted to improve before the Asian financial crisis (Kang and Kim 2013). It shows that debt-to-equity ratios for companies in large business groups were decreased up to about 100 % after Asian financial crisis.

  12. We used the first-digit Korean Standard Industry Classification (KSIC) for the classification.

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Authors and Affiliations

  1. Sogang Business School, Sogang University, 35 Baekbeom-ro, Mapo-gu, Seoul , 121-742, South Korea

    Pyung K. Kang

  2. College of Business and Economics, Hanyang University, 55 Hanyangdaehak-ro, Sangnok-gu, Ansan-si, Gyeonggi-do , 426-791, South Korea

    Yoo Chan Kim

Authors
  1. Pyung K. Kang
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  2. Yoo Chan Kim
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Correspondence to Yoo Chan Kim.

Additional information

We are grateful to an anonymous reviewer and conference participants at the 13th Meeting on Group Decision and Negotiation in Stockholm, 2013 for their valuable comments and suggestions. This work was supported by the Sogang University Research Grant of 201410007.01. All errors are the authors’ responsibility.

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Kang, P.K., Kim, Y.C. The Impact of the Ownership Discrepancy Between Cash-Flow Rights and Voting Rights on Firms’ Soft Asset Investment Decisions: Evidence from Large Business Groups in South Korea. Group Decis Negot 24, 429–450 (2015). https://doi.org/10.1007/s10726-014-9397-3

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