Trademark Royalty Transactions and Tunneling

This study investigates whether intragroup trademark royalty transactions are utilized as a means of tunneling within Korean large business groups, commonly known as chaebols. My analysis of trademark royalty transactions within 64 chaebol groups in 2019 and 71 chaebol groups in 2020 reveals several key findings. Firstly, my research indicates that chaebol member firms tend to pay higher amounts of trademark royalties when there is a greater wedge, representing the gap between controlling families’ control rights and cash flow rights. Secondly, I find that member firms receive increased trademark royalties when controlling families possess higher cash flow rights, supporting the tunneling scenario. These results remain consistent when I focus exclusively on publicly listed firms in my sample and conduct a propensity score matching analysis, strengthening the reliability of my findings. Additionally, I find that real estate rent and management consulting fee transactions, which are another source of non-dividend income for chaebol firms, yield comparable results to trademark royalty transactions. I find that the presence of a group head exacerbates the tunneling behavior by chaebol owners, while the supervision of the KFTC and audit efforts diminish the practice of tunneling using trademark royalties and real estate rents, respectively. Consequently, this study contributes to the existing literature on related-party transactions and tunneling by shedding new light on trademark royalty transactions in chaebol groups. My findings offer valuable insights to regulators and oversight bodies aiming to curb unethical practices by chaebol owners.