What Determines the Ownership Structure of Business Conglomerates? On the Cash Flow Rights of Korea's Chaebol

We examine a number of firm- and group-level factors that shape the ownership structure of business conglomerates, which can include both public and non-public firms. Using an exclusive set of 1997-2002 data on the intra-group shareholdings of 46 of Korea's largest conglomerates, or chaebols, we show that the contribution of individual firms to group control and profitability are important determinants of ownership structure in Korea's chaebol: the controlling shareholder's cash flow rights in a group-affiliated firm increases with the firm's contribution to group control and profitability. We also find that the level of disparity between voting and cash flow rights is significantly higher than the levels previously reported in the literature on Korean firms, which makes use of only public firms, indicating that non-public firms play a substantial role in increasing the disparity.