Business groups and regulatory institutions: Korea's chaebols, cross-company shareholding and the East Asian crisis

Abstract

We investigate whether the Korean government’s anti-chaebol corporate governance campaign during the East Asian financial crisis had its intended effects on cross-shareholdings among the largest chaebols. Cross-company shareholdings allowed chaebol families to control their groups’ affiliates far beyond what their direct equity stakes suggested. These families had long been too powerful for even determined governments to curb, consistent with argument on the profound difficulty for governments seeking to rein in the financial and political power of such groups. Accordingly, only rarely do governments have access to the necessary political and economic circumstances to undermine that power. The 1997 financial crisis appeared to present one such occasion to the strongly anti-chaebol government of Kim Dae-Jung. Previous failed government attempts indicated potential pitfalls for this campaign. Our findings show that although circumstances sufficiently empowered this government, chaebol families maintained their cross-shareholdings and corporate control. In the face of an incoherent government campaign, leading chaebol families were not adaptive and accommodative, but responsive and aggressive. We suggest therefore that institutional theory needs to take greater cognisance of questions of conflicting interests, power and politics.