Corporate fraud under pyramidal ownership structure: Evidence from a regulatory reform

This paper explores a causal relationship between firms' ownership structures and the likelihood of corporate fraud. We document that central firms that control the business group tend to commit corporate frauds related to unlawful intragroup trades (collusive activities and unfair transactions). Following South Korea's 2001 regulatory reform that imposes a ceiling on firms' total amount of shareholding of domestic companies, the frequency of corporate frauds was reduced more in central firms than in non-central firms as the controlling owner's cash-flow rights dropped more in central firms. These results suggest that controlling owners commit frauds to pursue their private benefit.