The costs (and benefits?) of diversified business groups: the case of Korean chaebols

Abstract

We examine the Korean chaebol business structure to determine the costs and benefits that r esult from a diversified corporate business structure. We find that chaebol-affiliated firms suffer a value loss relative to non-chaebol firms, similar to that reported in the literature for diversified U.S. firms. We find that this value loss holds even after controlling for the relatedness of the diversification present within the chaebol. We observe that chaebol firms tend to pursue policies that emphasize profit stability rather than profit maximization. We also discover evidence of

over-investment by chaebol managers in low performing industries. Chaebols appear to cross- subsidize the weaker members of their group, with negative consequences for aggregate

organizational value. We do find however that chaebol firms enjoy greater debt capacity and thus lower tax burdens. But because chaebols suffer an overall value loss, we conclude that the costs associated with chaebol membership exceed the benefits.