Competitiveness and Agency Problem in Shared Advertising of Chaebol
Asian Tax Journal Vol. 20 No. 4 (2019), pp. 35-63
Abstract
This study examines the competitiveness and agency problem arising from resource sharing of chaebol in terms of advertising. Chaebol could share advertising resources among affiliates as they co－advertise at the group－level with sharing costs or get benefits indirectly from the other affiliate’s advertising for free. This advertisement sharing would result in lower advertising costs and higher profits, compared to non－chaebol firms, because advertising costs are fixed costs rather than variable ones, which reduce costs but raise profits per unit with the economy of scale. However, chaebol could have higher advertising costs and lower profits if it run advertisements to make up for the socially negative perception of chaebol or build a global brand regardless of its business performance. In addition, it is probable that the cost－sharing of advertisement among affiliates is distorted by controlling shareholders’ private interests because advertisements are generally ran by in－house advertising agency within a group. This study investigates advertising costs, earnings before advertising expenses, market value, and ownership structure using the sample of listed firms from 2003 to 2014. The findings are as follows. First, chaebol firms have lower advertising costs but higher earnings before advertising expenses than non－chaebol firms. In particular, chaebol’s profits are positively associated with advertising expenses of the other affiliates, supporting the effect of resource sharing in terms of advertising. Second, among chaebol firms, firms with higher stakes of controlling shareholders show lower advertising costs, suggesting the cost allocation in favor of controlling shareholders. This study contributes to the literature by showing both the competitiveness of shared advertising such as reduced costs and the agency problem like the cost distortion for private interests of controlling shareholders.
Keywords
- Chaebol
- Resource Sharing
- Advertising Expense
- Tunneling
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