Newly established manufacturing firms in Korea without any corporate shareholder participation – stand-alones - exhibit significantly higher profitability and smaller asset size compared to those set up by corporate shareholders – pyramidal subsidiaries. Pyramidal subsidiaries set up by large business groups or chaebols engage in more related party transactions generating more negative internal earnings relative to stand-alones. For pyramidal subsidiaries, revenues generated from affiliated firms are positively correlated with overall profitability, while expenses paid to affiliates are negatively correlated. Nevertheless, combined related party transactions adversely affect overall profitability of all infant firms, regardless of their initial ownership structure.
Keywords: Stand alone; Pyramidal subsidiary; Business group; Corporate governance; Related party transaction; Establishment; Korea
