Relationship between management ownership and firm value among the business group affiliated firms in Korea

In this paper, we revisit an old issue on the relation between management ownership and firm's value. The Korean panel data on the business group firms, allows us to compute ownership right and control right separately for each business group affiliated firm. Our measures are different from the similar measures on the Korean firms as in Baek et al. (2004) or Joh (2003). Rather than confounding the two offsetting effects, this paper tests convergence of interest hypothesis and entrenchment hypothesis separately. Empirical findings show that, given control right, there is no clear-cut relation between firm value and the inside management ownership for most firms with the inside management ownership less than 42%, that there is a positive relation between firm value and the inside management ownership for those firms with the inside management ownership higher than 42%, and that, given ownership right, profitability decreases as control right increases.

► Ownership right and control right are separately measured from information on shareholding matrix. ► Convergence of interest hypothesis and entrenchment hypothesis are separately tested. ► Given control right, there is a weak positive relation between firm value and the inside management ownership. ► Given ownership right, profitability decreases as control right increases. ► Results are only weakly consistent with the convergence of interest hypothesis, but strongly with the entrenchment hypothesis.