Tunneling Through Group Trademarks

This study documents how group trademarks, comprising the business group’s name and logo, can be used for the benefit of controlling families at the expense of outside minority shareholders. Using a sample of business groups in Korea, we find evidence consistent with this hypothesis. First, firms are more likely to be licensor firms if the controlling families hold higher cash flow rights. Second, firms are more likely to be licensee firms and subject to higher royalty rates if their sales volume is larger and the controlling family’s cash flow rights in such firms are further below those in the licensor firms. Third, dividend payouts of licensee firms are negatively associated with their royalty payments if the controlling family’s cash flow rights in such firms are far below those in the licensor firms. Lastly, these results show up more strongly in pure holding company groups, where the licensor firms have no business operation of their own and, thus, rely more heavily on trademark revenue.