Analysis of the corporate structure of chaebols - a study of Samsung and LG

Abstract

Chaebols are family owned Korean business conglomerates which comprise of a large number of firms and assisted by the government. These conglomerates have been typically characterized by large cross holdings and circular investment structures. These conglomerates help in funding projects by developing internal capital markets, help in monitoring in absence of well developed institutions in the country and also give higher debt capacity for the conglomerates. But on the negative side due to such complex holdings of firms there is large divergence between the cash flow rights of the firm and the ownership control it has over the firm. Due to the family owned nature of these firms we find that typically the controlling owner exhibits higher ownership control over the firms than the cash flow rights it has. This may lead to agency problems within the firm and hence affect the dividend policy of the firm too. The problems of expropriation of wealth and tunneling of resources may become more pronounced during a crisis when the investment opportunities are not very favorable. This project tries to understand various issues related to crossholdings and corporate structure in Chaebols by studying in detail two large Chaebols in Korea viz. Samsung and LG. The financial statements and firm performance of these enterprises has been analyzed to determine the effect of the corporate structure on shareholder’s value. Also the shareholding pattern in the two has been constructed and analyzed to study the effect of divergence on the firm performance. Our findings show that Samsung still persists with a circular investment structure with large amount of crossholding while LG has restructured its corporate structure to a holding based company. The firm performance as shown by Tobin’s Q ratio does not show any major difference between the firms with relation to their corporate structure. Though divergence is not a significant contributor to the firm performance in case of LG it shows a high correlation with the performance of Samsung. The agency problems have not been evident from the dividend policy since Samsung shows a much higher growth rate in spite of having a higher divergence in the firm. The current regulatory environment in Korea warrants that Samsung modify the web of complex crossholdings and restructure its organization to a holding company based simplified structure.