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In family firms, the succession of controlling equity stake to next generation is an issue of paramount importance. This, however, can be a major challenge in the presence of heavy inheritance or gift tax burden (high tax rate and absence of tax-saving vehicles, such as trusts or foundations) and in the absence of dual-class equity. Such regulatory environment may lead families to seek alternative ways of succession. As for families controlling business groups, one way of doing so is making use of related-party transactions among member firms. By favouring firms where the heir holds significant equity stake, the family can tunnel corporate resources to the heir. Eventually, the firm can grow large enough to acquire controlling equity stakes in other firms within the group. In this paper, we investigate this possibility using Korean chaebol firms during a sample period of 2000-2009. We identify firms where heirs become a major shareholder (treatment group) and compare them against their year-industry-size-matched firms (control group) before and after the ownership change. Difference-in-differences test with firm fixed effects reveal that treatment group firms experience greater related-party transactions, benefit from them in terms of earnings, pay out more dividends, and become more important in controlling other firms in the group.

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