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RFS Advance Access originally published online on June 11, 2008
Review of Financial Studies 2008 21(5):2015-2060; doi:10.1093/rfs/hhn055
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© The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org.

Intragroup Propping: Evidence from the Stock-Price Effects of Earnings Announcements by Korean Business Groups

Gil S. Bae
Korea University

Youngsoon S. Cheon
Chungang University

Jun-Koo Kang
Nanyang Technological University and Michigan State University

Address correspondence to Jun-Koo Kang, Division of Banking and Finance, Nanyang Business School, Nanyang Technological University, Nanyang Avenue, Singapore 639798; telephone: (517) 353-3065; fax: (517) 432-1080; e-mail: kangju{at}bus.msu.edu.

JEL Classification: G14, G32, G34


  Abstract

Using earnings announcement events made by firms belonging to Korean chaebols, we examine propping within a chaebol. Consistent with the market's ex ante valuation of intragroup propping, we find that the announcement of increased (decreased) earnings by a chaebol-affiliated firm has a positive (negative) effect on the market value of other nonannouncing affiliates. The sensitivity of the change in the market value of nonannouncing affiliates to abnormal returns for the announcing firms is higher if the cash flow right of the announcing firm's controlling shareholder is higher. The sensitivity is also higher if the announcing firm is larger, performs well, and has a higher debt guarantee ratio.

The authors thank Josh Pierce, Yishay Yafeh, and especially two anonymous referees for their insightful comments. Gil Bae acknowledges financial support from the Korea University School of Business SK Research Grant and Youngsoon Cheon acknowledges financial support from the Chungang University Research Grant.


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