The Role of Intra-Conglomerate Equity Investment: Evidence from Korean Business Groups

Abstract

This paper demonstrates that group-affiliated firms have financial attributes that are different from those of stand-alone firms and suggests that these differences are consistent with ex-post consequences of receiving equity investment (EI) in business groups. Therefore, intra-group EI serves as an important driver of these differences. The paper verifies the results by considering the case of Korea's EI regulation. EI recipients invest more, but are less profitable than firms receiving no such investment. Group-affiliated firms reduce their dividend payout and short-term debt after receiving EI. Finally, recipients increase capital investment when they perceive their EI to be persistent, and those receiving massive EI use funds differently from those receiving normal EI. The results suggest that massive EI may involve ownership-related intentions, not financial support.