Value destruction for private benefits of controlling shareholders : evidence from mergers between associated firms in Korea

다국어 초록 (Multilingual Abstract)

This paper investigates the real earnings management by bidder firms prior to mergers between associated firms in Korea. I find that bidders, particularly those with the control-ownership disparity of controlling shareholders, are likely to manipulate their earnings downward before mergers through real activities, especially by decreasing sales and production, when controlling shareholders’ ownership is higher in targets than in bidders. Furthermore, this real earnings management is associated with lower pre-merger stock prices of bidders, making merger terms favorable to controlling shareholders. These results suggest that controlling shareholders pursue their own private benefits in mergers of their firms and the real earnings management functions as one of the channels of tunneling.

목차 (Table of Contents)

• 1. Introduction. 1
• 2. Literature review and hypotheses 5
• 2-1. Literature review 5
• 2-2. Hypotheses development 9
• 3. Data and methodology 11
• 3-1. Measuring voting rights, cash flow rights, and control-ownership disparity. 11
• 3-2. Estimating real earnings management. 13
• 3-3. Measuring a long-term abnormal return prior to a merger 15
• 3-4. Model specification 16
• 3-5. Sample selection 18
• 4. Empirical results. 20
• 4-1. Real earnings management of bidders before mergers 20
• 4-2. Bidder stock returns in the year before mergers 23
• 4-3. Additional tests: real earnings management and relative voting right 25
• 5. Conclusion 25
• Appendix A. Definition of variables. 37
• References 40