CORPORATE GOVERNANCE ISSUES OF CIRCULAR-SHAREHOLDING AND DEBT PRICES: EVIDENCE FROM KOREA

Abstract

This paper investigates the impact of circular-holding ownership structure on debt prices, taking advantage of the new rule in Monopoly Regulation and Fair Trade Act (MRFTA), which prohibits additional circular financing, as a natural experiment. The empirical methodology adopts difference-in-difference analysis with matching techniques. The result shows the policy has had no significant impact on bond returns of affected firms, suggesting that bondholders are indifferent to the circular-holding structure itself. The paper attributes the apparent ineffectiveness of the policy to the lack of sophistication in targeting specific corporate governance issues created by the circular-holding model