Estimating the Value of Absolute Power: Evidence from Judiciary Decision Event on Controlling Shareholders in Large Business Group

In a recent paper titled ‘Estimating the Value of Absolute Power: Evidence from Judiciary Decision Event on Controlling Shareholders in Large Business Group’, we analyse the effects of judicial decisions regarding criminal acts, embezzlement and breach of fiduciary duty on the market value of a firm. The controlling shareholder (so-called owner) in a Korean conglomerate takes an important position. As well as being large shareholders, company owners are, in most cases, directly involved in the management.

It can be easily anticipated that the prosecuting or sentencing of controlling shareholders has a negative effect on the value of a firm. First, the temporary absence of the owner due to the outcome of a court decision (eg directly, being indicted in custody, or imprisoned; indirectly, being involved in a criminal action, stepping down from CEO Position, and so on) can have a negative impact on management. Second, prosecuting or sentencing controlling shareholders can seriously damage a firm’s reputation.

Our main findings are as follows: first, judicial decisions relating to controlling shareholders generally do not have a significant group-wide effect on a company’s stock prices; second, the portion of firms that receive a positive impact and a negative impact from having a controlling shareholder held in custody is almost the same (46% versus 54%). In situations where there is an appeal, the portion of firms that receive a positive impact decreases to 38%, while the portion of firms that receive a negative impact increases to 62%. Third, the effect of court decisions on affiliated firms within the same business group is asymmetric. For instance, such decisions will have a positive effect on affiliates where a controlling shareholder holds a large proportion of the shares; however, it will have a negative impact on the affiliates which are thought to be more likely to grow at faster rates in the future. For this reason, the sentencing of the controlling shareholder itself induces value transferring between the different affiliated firms in a given company group.

Changmin Lee is an Assistant at Hanyang University - Seoul Campus, and Han Soo Choi is an Associate Fellow at the Korea Institute of Public Finance.