Business Groups and Tunneling: Evidence from Brand Royalty Flows within Chaebol

This paper investigates the intragroup flows of brand royalties within large Korean business groups. We find that business group member firms pay a greater amount of brand royalties when the associated business groups adopt a holding company governance structure, consistent with the public allegation that chaebols tunnel wealth from member firms to holding companies that they directly control. However, member firms pay a smaller amount of brand royalties when their related party transactions (RPTs) are monitored, for example, when the firm is on (i) the watch list of an external watchdog agency for controlling shareholders’ unfair profit reaping from RPTs or when its board of directors internally operates (ii) a designated committee on RPTs or (iii) an audit committee. The results suggest that the alleged tunneling behavior of large business groups can be mitigated by external or internal monitoring on RPTs