Changmin Lee

What Constitutes Too-Big-To-Jail?

This paper investigates judicial size premium, the judicial bias in favor of large economic organizations. The Korean judiciary is biased with regard to chaebols (large family business groups). Convicted chaebol-related defendants receive 9.9%p more jail-sentence suspension and 19 month shorter jail term than non-chaebol counterparts do. The leniency remains robust after controlling for the quality of defense attorneys and other sentencing factors. We hypothesize that this bias occurs because (1) the judiciary worries that strict sentences against chaebols may cause system risk; and (2) the court follows the civil law tradition of being generous to in-group transactions. The results support both hypotheses. The larger the chaebol, the larger the judicial bias. Controlling for the in-group transactions explains much of the bias. With great victories in the court, chaebol-related offenders defend their wrongdoings, arguing that illegal in-group transactions are for the interest of entire business group, not for their private gain.

Real Independence of External Directors and Firm Value

본 논문은 기존 국내 재벌(대기업집단)의 이사회 연구에서 주목하였던 사외이사 비율과는 다른 사외이사의 실질적 독립성 개념을 제시하고 이것이 기업 가치에 어떤 영향을 미치는 가를 분석하였다. 사외이사들은 계열사, 학연, 소송대리, 정부/채권단, 제휴, 그리고 기타 관계들로 인해 임원진 또는 고용 기업과 연계될 수 있으며, 이로 인해 이사회의 독립성을 저해할 가능성이 있다. 우리는 이러한 관계를 가진 사외이사를 제외한 이사회 구성원들이 실질적 독립성을 가질 수 있다고 간주한다. 본 연구의 주요 발견은 다음과 같다. 첫 번째, 우리의 연구표본인 대기업집단 사외이사 비율은 44.95%이나 실질적으로 독립적인 사외이사의 비율은 31.95%로 나타났다. 실질적으로는 독립적이지 않은 사외이사의 비율이 13%에 이르는 것이다. 두 번째, 회귀분석 결과 실질적으로 독립적인 사외이사 비율이 높을수록 그리고 비독립적 사외이사 비율이 낮을수록 기업가치가 높아지는 것으로 분석되었다.

Does the Professional Manager Blow the Whistle on Founding Families? New Evidence on the Dark Side of Family-Controlled Firm

This paper investigates the relationship between family firm, internal, external governance and corporate fraud. We focus on the judicial and market attitude toward professional top managers, not controlling shareholder, involved in corporate fraud, especially in family-controlled business group in Korea, Chaebol. We find that top managers receive lighter sentences. The probability that a professional manager goes to prison is 35.7%p less than that of a controlling shareholder. Moreover, no top management ever actually goes to prison at an appellate court. The possibility that a professional manager is held pretrial drops by 39.2%p. Secondly, almost 55% of the professional top managers involved in corporate crimes come back to the position in the near future after sentencing decisions. Almost 84% of resurrected professional managers in the market had worked for the Chaebol-affiliated firms at the moment of their corporate crimes. More surprisingly, 87% of returned Chaebol managers take the executive position at their affiliated firm. Our findings suggest a possibility that the ill-functioned legal system and market for professional managers helps large shareholders such as founding families capture them to serves family interests.

How Board Quality Affects CEO and Executive Team Pay

Board quality is likely to have an important influence on CEO compensation. However, there has been little investigation in the literature. We examine the relationship between the quality of boards, pay and pay allocation (incentive versus fixed, CEO versus executives below CEO) of executive teams. We hypothesize that the higher the quality of boards, the better the monitoring services of the boards; better monitoring increases the chance of finding the current executives’ true quality and of replacing underperforming executives; better monitoring can also decrease total pay by reducing information costs (e.g. efficiency wage and overpayment from adverse selection) and incentive pay. Our empirical analysis uses three different proxies for director quality: (1) the size of firms that board members hold as external directors (social capital of directors), (2) the number of external directorships held by board members, and (3) the proportion of board members holding multiple directorships. The values (2) and (3) measure the amount of time that directors spend per firm. Our findings are as follows: The more valuable the social capital of outside directors, the less (more) incentive (fixed) pay to top executives including CEO. The busier the average directors of a board are, the higher the total and incentive pay. In addition, the less independent the compensation committee, the higher the CEO pay slice (CPS). The increased CPS results from both incentives and fixed pay. Such a relationship is stronger when a CEO is also the chair of the board. We conclude that the quality of boards is an important determinant of the pay structure of executive teams.