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Private benefits of control and firm leverage: An analysis of Korean firms

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Abstract

This paper investigates the leverage choices of an entrenched controlling party. If debt effectively curbs the private benefits of control, the controlling shareholder is given incentives to avoid debt. Using estimates of the private benefits of control and financial statement data from selected Korean firms, we find that a controlling party with large private benefits tends to lower debt. This relationship was concentrated after the Asian financial crisis. However, before the crisis, firms that affiliated with Korean conglomerates, chaebols, used more debt as private benefits increased. A financial reform program triggered by the crisis seems to have actuated the disciplining role of debt.

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Authors and Affiliations

  1. Graduate School of Management, Korea Advanced Institute of Science and Technology, 207-43 Cheongryangri-dong, Dongdaemoon-gu, Seoul, 130-722, Republic of Korea

    Jangkoo Kang & Joon-Seok Kim

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  1. Jangkoo Kang
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  2. Joon-Seok Kim
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Correspondence to Jangkoo Kang.

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JEL Classification G32, G34

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Kang, J., Kim, JS. Private benefits of control and firm leverage: An analysis of Korean firms. Rev Quant Finan Acc 27, 439–463 (2006). https://doi.org/10.1007/s11156-006-0046-z

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  • DOI: https://doi.org/10.1007/s11156-006-0046-z

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