Ownership Complexity and Firm Value: Evidence from Korean Chaebols

This study examines how ownership complexity affects firm valuations by analyzing Korean chaebols' transition from opaque circular-shareholding to relatively transparent pyramidal-shareholding structures between 2011 and 2018. We show that ownership complexity can obfuscate investors' understanding of the severity of agency conflicts between controllers and minority investors. Simplifying ownership structures creates transparency about controller incentives and impacts valuations through two channels---increasing earnings informativeness and enabling investors to update expectations about future fundamentals based on revealed agency conflicts. Because these channels can oppose each other, simplifying ownership can create divergent valuation effects. Strikingly, we find that firms with closer controller-minority incentive alignment gain value as investors discover better-than-expected governance, while firms with greater controller-minority incentive conflict lose value as transparency reveals worse-than-expected agency problems. These results are not driven by concurrent real changes in governance, monitoring, operations, or resource allocation. Our findings demonstrate that ownership opacity can benefit poorly-governed firms by pooling them with better-governed firms in investors' assessments, and that governance reforms aimed at improving transparency can produce heterogeneous outcomes depending on what that transparency reveals.