When heirs become major shareholders: Evidence on pyramiding financed by related-party sales

- Examine how related-party sales are used as a means for managerial succession
- Firms where heirs become major shareholders experience greater related-party sales.
- Such firms benefit from related-party sales in terms of earnings.
- Such firms also gain importance in controlling other firms in the group.
- We do not find these results when non-heirs become major shareholders.

This study investigates how related-party sales are used as a means to financially support the firms in which heirs become major shareholders and allow them to strengthen control over other firms in the group through pyramiding. From a universe of Korean chaebol firms during 2000-2011, we identify a subset of firms where heirs become major shareholders (treatment group) and compare them against their propensity-score-matched firms (control group) before and after the ownership change. A series of difference-in-differences tests with firm fixed effects reveal that treatment group firms experience greater related-party sales, benefit from them in terms of earnings, and gain importance in controlling other firms in the group. However, we do not find these results when non-heirs (e.g., controlling shareholders and other relatives) become major shareholders.