Transfer of Control and Ownership Structure in Family Firms Hojong Shin* This paper documents a novel channel of transfer of control in family firms. I provide evidence, from a natural experiment, that avoiding inheritance tax is the motivation behind intra-group mergers in Korea. Due to the tax reform that increased the personal inheritance tax by 25 percentage points, firms burdened by a high personal inheritance tax are likely to increase stock-for-stock intra-group merger activities during the post- tax-reform period. This result suggests that firms with heavy inheritance tax burdens acquire affiliates owned by heirs, who then convert private target shares into acquirer shares while avoiding the inheritance tax. Keywords: succession tax, tax avoidance, intra-group merger, family firm, transfer of control, ownership structure JEL Codes: G30, G34, H26 *Department of Finance, College of Business Administration, California State University, Long Beach, CA (
[email protected]). I am deeply grateful for the Best Paper Award at the Asian Finance Association Conference and the Best Dissertation Award at the Conference on Asia-Pacific Financial Market. I thank all participants for their comments at the Finance Management Association Conference, Midwest Finance Association Conference, Southern Finance Association Conference, National Tax Association Conference, IFABS Oxford Conference, Asian Finance Association conference, Conference on Asia-Pacific Financial Market, Conference on Empirical Legal Studies, and seminars at Michigan State University, University of Cincinnati, University of Sydney, and California State University, Long Beach. This paper was previously circulated as “What Else Shapes Firm Boundaries? Succession Taxes.” I. Introduction In exchange for these financial contributions, prosecutors say, Ms.