This study examines the impact of concentrated ownership on information asymmetry of
Korean listed firms and suggests several alternative mechanisms to mitigate the negative effect
of such ownership. Ownership structures of Korean firms are likely to be highly concentrated,
and controlling shareholders have actively participated in the management process. Thus,
information asymmetry between controlling and minority shareholders can be particularly
serious when there are few mechanisms to protect minority shareholders and control the
discretionary power of controlling shareholders. Private information of controlling shareholders
may cause higher adverse selection costs in trading activities on firms’ securities, and thus
higher cost of external financing.
Empirical evidence shows that information asymmetry is positively associated with
concentrated ownership, and also shows that the positive relationship between concentrated
ownership and Probability of Information-Based Trading (PIN) is primarily driven by the
increase in the relative amount of information-based trading. Furthermore, concentrated
ownership is negatively associated with the subsequent new information event, indicating that a
controlling shareholder protects his proprietary information flow to the public. This study also
finds that analyst following can reduce information asymmetry as an alternative information
dissemination mechanism, and that institutional investors and internal corporate governance
systems can not help alleviate the substantial negative effects of concentrated ownership.
Keywords: concentrated ownership; probability of information-based trading; information
asymmetry; analyst following.
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