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## ■ Paper basic information
- Author: W Kim, W Kim, KS Park
- Source: Corporate Governance Institute–Finance, SSRN, 2021
- Topic: Comprehensive review of Korean corporate governance research — Link between ownership structure, exploitation, and cost of capital
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## ■ Key findings
- Expropriation of minority shareholders by controlling shareholders structurally increases the company’s cost of capital.
- The larger the ownership-control gap, the higher the risk premium required by external investors.
- Korean companies are bound to have chronically high capital raising costs without improvement in governance structure.
- Morck et al. Framework basis: ownership-control gap → insiders pursue private interests → damage to corporate value
- It is demonstrated that both stock price level and capital efficiency improve as governance transparency increases.
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## ■ Effects of ownership-control gap
| Governance Indicators | Consequences of exploitation of minority shareholders |
|---|---|
| Cost of capital | rising |
| stock price level | Underrated |
| Investor Confidence | decline |
| dividend income | decreased or irregular |
| External financing | Increased difficulty |
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## ■ Korean market specialties
- Korea has a unique structure in which management control is very strong despite the controlling shareholder's shareholding ratio being low.
- Maintain dominance through a three-stage combo of circular shareholding + private placement CB + executive dispatch
- Despite attempts at reform after the foreign exchange crisis, actual improvement in governance structure was limited.
- Individual investors are at the lowest level of information asymmetry in this structure.
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## ■ Connection with relational risk
- “Exploitation of minority shareholders → increase in capital costs” is a typical pattern of companies with a high relational risk score.
- Governance risk indicators: ownership-control gap, board independence, proportion of internal transactions
- Research by Kim et al. (2021) provides academic support that relational risk is not simply an individual corporate risk but is linked to **distortion of the cost of capital in the entire market**
- It is this ownership-control gap that RaymondsRisk’s Governance Risk indicator captures.
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## ■ One-line summary of the evangelist
> "The more a controlling shareholder robs minority shareholders, the more the company's capital raising costs rise. Expropriation is not free."
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## ■ Reference materials
- Kim, W., Kim, W., & Park, K.S. (2021). A Survey of Research on the Corporate Governance of Korean Firms. *SSRN Working Paper*, Corporate Governance Institute–Finance.
- Overview of relational risk: https://www.konnect-ai.net/whitepaper
- Blog series: https://blog.naver.com/raymondsrisk
#relational risk #raymondsrisk #raymondsindex #konnectai #governance structure #cost of capital #minority shareholders #ownership structure
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