The value-relevance of earnings and book value, ownership structure, and business group affiliation: Evidence from Korean business groups

We investigate the quality of two primary accounting summary measures, i.e., earnings and book value, provided by firms belonging to Korean business groups (chaebols). We find that the value-relevance of earnings and book value is significantly smaller for firms affiliated with business groups. We also find that cross-equity ownership (a proxy for the agency problem between controlling and minority shareholders) negatively affects value-relevance, while foreign equity ownership (a proxy for the monitoring effect) positively affects value-relevance. This evidence is consistent with the view that the poor quality of earnings and book value provided by chaebol-affiliated firms is due to the inherently poor governance structure of chaebols.