The ownership structure of Korean family firms is characterized by the dominance of controlling shareholders over affiliates thanks to cross-holding schemes. This study argues that western-style corporate governance, which was introduced in an effort to protect non-controlling shareholders in the wake of Asian financial crisis and other global financial scandals, will not work properly when firms are heavily influenced by excess voting rights created by cross-holding schemes. This study also examines whether cross-holding affects earnings management practices. We document that cross-holding significantly weakens corporate governance mechanism, thereby failing to reduce Type II agency costs between controlling shareholders and non-controlling shareholders. However, we document that cross-holding negatively affects accruals, indicating that cross-holding reduces Type I agency costs between shareholders and managers. We also document that cross-holding wedge and cash-flow rights, having common characters of enhancing the voting rights of controlling shareholders, play very different roles in financial reporting. Cross-holding affects accruals and earnings negatively, whereas cash-flow rights affect them positively.
Key words: cross-holding wedge, cash-flow rights, corporate governance, financial performance, earnings management
학회소식
공지사항
[2011년 제 4차] How does Cross-holding affect corporate governance
작성자 : 관리자
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게시일 :
2011-12-07