Executive Compensation: When a Firm is a Business Group Member

Executive Compensation: When a Firm is a Business Group Member

Hyungseok Kim, Woochan Kim

Series number :

Serial Number: 
447/2015

Date posted :

February 01 2015

Last revised :

March 09 2015
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Keywords

  • executive compensation • 
  • business groups • 
  • chaebols • 
  • tunneling • 
  • cash flow rights • 
  • control-ownership disparity • 
  • expropriation risk
This paper examines how executive pay is set when a firm is a business group member. Using Korea as a laboratory setting, we find that member firm?s cash compensation for its executives is positively linked to the stock performance of other member firms as well as its own. Further analyses reveal that this positive link to other members?
performance is consistent with the hypothesis of corporate resources being tunnelled from one member to another for the benefit of the controlling family. We find that this link is stronger to the performance of others that are more likely to benefit from tunneling (firms in which the controlling family has cash flow rights greater than those of the subject firm) and in firms that are more likely to suffer from tunneling (firms in which the controlling family has control-ownership disparity above the sample median).

Authors

Real name: 
Hyungseok Kim