We investigate the valuation effects of diversification activities by Korean business groups known as
chaebols before and after the 1997 Korean financial crisis. Employing a unique dataset of 2,894 firmyear
observations for the 1994-2000 period, we document the following main results. First, chaebol firms
are, on average, significantly less valuable than non-chaebol firms, indicating that a firm’s chaebol
affiliation comes with a value discount. Second, both chaebol and non-chaebol firms experience a
significant decline in firm value following the financial crisis. Third, unrelated diversification by chaebol
firms erodes in firm value throughout the whole period examined. In contrast, their related diversification
is associated with a significant value gain before the financial crisis but turns into a significant value loss
post-crisis. Overall, our study provides strong evidence on the significantly different valuation effects of
related versus unrelated diversification by Korean business groups and the importance of the Korean
financial crisis on these relations. Our findings are robust to different regression estimation specifications.
Keywords: related diversification, unrelated diversification, business groups, Korean financial crisis
