Intra-Group Propping: Evidence from the Stock-Price Effects of Earnings Announcements by Korean Business Groups

Intra-Group Propping: Evidence from the Stock-Price Effects of Earnings Announcements by Korean Business Groups

  This paper uses a large sample of earnings announcements between 1993-1998, made by firms belonging to Korean business groups (chaebols), to examine propping within affiliated firms. The announcement of an increase in earnings by a chaebol-affiliated firm is shown to have a positive effect on the abnormal returns for the value-weighted portfolio of other firms in the same group. Abnormal returns for non-announcing firms are also systematically related to corporate governance and the degree of resource- and risk-sharing ability of the announcing firm. The results, however, are concentrated in the first subperiod, during which the Korean economy was relatively healthy and chaebol member firms were not resource-constrained. These results are consistent with the existence of propping within chaebol-affiliated firms.