This study investigates the impact of the supply chain on the inter-corporate ownership structure among member firms within business groups. Previous literature suggests that profitable firms directly owned by the controlling shareholders are at the t...
This study investigates the impact of the supply chain on the inter-corporate ownership structure among member firms within business groups. Previous literature suggests that profitable firms directly owned by the controlling shareholders are at the top of the pyramidal structure. However, profitability may be endogenously determined based on related party transactions. Specifically, suppliers within the business group may generate higher profits through exclusive sales contracts with member firms. Based on a sample of large business groups in Korea, I find that suppliers are more likely to be located in the upper part of the pyramid. This result is more prominent in the relatively smaller groups (less than 10 trillion KRW in total assets), but it disappears in the top five business groups. This suggests that the incentive of controlling shareholders to expropriate corporate opportunity may be an important factor in structuring business groups.