Private benefits of control and firm leverage: An analysis of Korean firms

Authors: Kang, Jangkoo¹; Kim, Joon-Seok²

Source: Review of Quantitative Finance and Accounting, Volume 27, Number 4, December 2006 , pp. 439-463(25)

Publisher: Springer

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Abstract:

This paper investigates the leverage choices of an entrenched controlling party. If debt effectively curbs the private benefits of control, the controlling shareholder is given incentives to avoid debt. Using estimates of the private benefits of control and financial statement data from selected Korean firms, we find that a controlling party with large private benefits tends to lower debt. This relationship was concentrated after the Asian financial crisis. However, before the crisis, firms that affiliated with Korean conglomerates, chaebols, used more debt as private benefits increased. A financial reform program triggered by the crisis seems to have actuated the disciplining role of debt.

Keywords: Private benefits of control; Capital structure; chaebols; Financial crisis

Document Type: Research article

DOI: http://dx.doi.org/10.1007/s11156-006-0046-z

Affiliations: 1: Email: jkkang@kgsm.kaist.ac.kr 2: Email: years@kgsm.kaist.ac.kr

Publication date: 2006-12-01