What is the investment gap rate? — The real reason value-ups fail

It is often said that “chaebols are bad”.

However, few people know exactly what mechanism or structure is the problem.

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Min (2016) study: In the conglomerate structure, exploitation of minority shareholders occurs through legal rather than illegal channels.

Dissect those four structures.

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Structure 1 — Amplification of control through circular shareholding

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Company A → Company B → Company C → Hold shares in Company A again

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Control of the entire group with a minority stake:

Controls dozens of affiliates with an owner stake of 10-20%

- Kim KS (2015) CMS structure: Demonstration of a mechanism of complete control with minority shares

- The Board of Directors prioritizes the overall interests of the group (=owner interests)

Impact on Minority Shareholders:

→ Each affiliate cannot make independent decisions

→ Possibility of forcing unfavorable transactions within the group

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Structure 2 — Transfer of resources through internal transactions

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Concentrating profits to specific affiliates through inter-affiliate transactions:

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Affiliates with high ownership stake supply at a low price/purchase at a high price.

- Transfer of listed subsidiary profits to unlisted holding company

- Although it is a legal form of transaction, there is a loss to minority shareholders.

Yang (2017): Demonstration of Korean implementation mechanism of tunneling.

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Structure 3 — Capital transfer through CB·BW

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The most sophisticated exploitation mechanism:

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① Owner-linked corporation is involved in designing CB issuance conditions

② Low conversion price + insertion of refixing clause

③ The corporation acquires CB → acquires a large amount of stocks under favorable conditions

④ Dilution of minority shareholders’ shares + realization of profit from owner-linked corporation

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Heo Seo-young (2025): Demonstrates that minority shareholder wealth is systematically transferred in this structure.

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Structure 4 — Dividend suppression and capital accumulation

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Owners profit in two ways:

① Salary, bonus, severance pay (executive compensation)

② Detour transfer through affiliate transactions

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Meanwhile, dividends are minimized:

In the name of “reserve for future investment”

- In reality, it is an internal reservation to strengthen the owner’s control.

- Korea’s dividend payout ratio is significantly lower than that of the international community.

Minority shareholders have no choice but to expect the stock price to rise.

→ The stock price rises as the owner wishes → In the end, there is no exit.

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This is the essence of Korea Discount.

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Foreign agencies are aware of these four structures.

Therefore, we apply a structural discount to Korean stocks.

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Only individual investors don’t know.

No, even if I knew, there was no way to avoid it.

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RaymondsRisk quantifies this structure and provides it to individual investors.

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key message

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Exploitation does not break the law.

Design the structure.

Reading that structure is relational risk.

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■ Reference materials

Min (2016): Chaebol legal exploitation structure

- Kim KS (2015): CMS structure verification

- Yang (2017): Tunneling mechanism

- Seoyoung Heo (2025): CB conversion and loss of minority shareholders

- RaymondsRisk White Paper: https://www.konnect-ai.net/whitepaper

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