Value-destroying Mergers: Evidence from Korean Business Groups*

Abstract

In this study, we find evidence of tunneling in mergers among affiliated firms that belong to Korean business groups. Using a recent sample of Korean mergers during the 2000–2020 period, we find that control-motivated mergers to enhance the controlling family’s control over the business group significantly decrease the target’s value and that of the value-weighted combined portfolio of the acquirer and target. Our evidence indicates that tunneling persisted even after the implementation of several governance reforms in Korea following the 1997 Asian financial crisis, casting doubt on the effectiveness of those reforms in curbing the tunneling behaviors of Korean business groups.