The Holding Company Discount Phenomenon : Evidence from the Korean Financial Market

In Korea, the number of holding companies has increased steadily every year due to government deregulation. Establishing holding companies is a means by which companies attempt to improve corporate governance, especially when opacity is a problem due to circular shareholdings. Recently, however, it has been asserted that the holding company system is being exploited as a means of hoarding private wealth for chaebols . In this paper, we examine whether it is true that chaebols exploit the holding company system by verifying the existence of the holding company premium or discount. If the value of a holding company is lower than the total value of the subsidiaries whose shares that holding company possesses, it cannot be concluded that the system is being abused by chaebols , since, in such cases, controlling shareholders give up shares of subsidiaries, taking shares of the holding company in return. Our analysis proves the existence of the holding company discount phenomenon. In order to elucidate the causes of discounts, we employ firm characteristics, financial ratios, the number of subsidiaries owned by the holding company, and the number of subsidiaries that are listed in the Korean stock market as variables. We find that the holding company discount increases as the number of listed subsidiaries increases because holding companies are less attractive to investors relative to listed subsidiaries