Tunneling Through Group Trademarks

This study documents how trademarks can be used to benefit controlling families at the expense of outside minority shareholders. Using a sample of business groups in Korea, we find evidence in support of this. First, firms are more likely to be licensor firms if the controlling family holds higher cash flow rights. Second, firms are more likely to be licensee firms and subject to higher royalty payments if their controlling family’s cash flow rights are further below those in the licensor firms (i.e., higher cash flow rights differentials) and if their sales volumes are larger. Third, shareholder distributions (dividend payouts and stock repurchases) and market values are negatively associated with royalty payments in firms with higher cash flow rights differentials. Lastly, these results manifest more significantly in pure holding company groups, where the licensor firms have no business operation of their own and, therefore, rely more heavily on trademark revenue.