The Effect of Circular Shareholding Restrictions on Firm Innovation: Evidence from Korean Business Groups

This study examines the effect of disproportional ownership structures on firm innovation. To establish a causal relationship, this study employs a difference-in-differences (DID) approach that utilizes Korea’s introduction of circular shareholding restrictions in 2014. The results show that circular shareholding restrictions negatively affect the level of firm innovation, as measured by the firm’s number of patents. This impact is more salient in R&D-intensive firms and industries with higher volatility. These findings suggest that disproportionate ownership promotes firm innovation by shielding managers from short-term equity market pressure.