Tunneling by Related‐party Transactions: Evidence from Korean Conglomerates

This study analyzes tunneling created by related‐party transactions (RPT) in relation to controlling shareholders' cash‐flow rights. Results of the analysis confirm a statistically significant relation between cash‐flow rights and the earning rates of major controlling shareholders, indicating a transfer of wealth through RPT among affiliates of business groups. Furthermore, it is found that more sales made through RPT out of the total sales result in a higher earning rate, which implies that RPT affect the differences in earning rates among affiliates.