earticle

영어

This paper examines how malicious corporate raiders operating under poor investor protection environment may actually raid target firms’ resources through takeovers. Our perspective is distinct from both (1) conventional free cash flow theory where the central conflict of interests lies between bidder’s shareholders and managers, and (2) intra-business group tunneling where resources are transferred among existing member firms through non-arm’s length transactions. Using a large sample of publicly traded firms in Korea, we find that the probability of explicit looting through embezzlement or breach of fiduciary duty conditional on a recent change in control amounts up to 12%, almost 10 times as large as the corresponding probability when control remains intact. This finding is robust to controlling for the factors that induced the control change in the first stage. Such misbehaviors are more likely in targets with more liquid assets or multiple control changes. Market reactions to changes in control are initially positive but revert back within 6 months, mostly due to the persistent negative returns for those that later become subject to embezzlement or breach of duty. These findings suggest that market for corporate control may aggravate agency problems when investor protection is insufficient.