We examine the spillover effects that occur within Korean business groups (i.e., chaebols) by focusing on the market reactions of event firms to announcements of credit rating changes. We find that there are positive spillovers (caused by positive market reactions) and negative spillovers (caused by negative market reactions) that are driven by the market reactions of event firms. Our analyses indicate that negative spillovers are more dominant than positive spillovers. Moreover, a spillover that is driven by a leading firm within a business group has stronger effects on other firms in the group than a spillover that is driven by a non-leading firm. This suggests that the market evaluation of a business group is conducted more on the basis of a leading firm than a non-leading firm within a group. Finally, we show that the spillover effects that are analyzed in our study are more noticeable when the business relationship between an event firm and other affiliated firms is closer. (JEL G14, G24)

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Using extensive hand-collected data on granted patents, we examine the effect of institutional blockholder monitoring on corporate innovation in Korea. Specifically, we focus on the relation between institutional blockholding and firm innovation. We find that institutional blockholders positively influence firm innovation and that this positive effect is driven primarily by foreign institutional blockholders, particularly when they engage in passive monitoring. The Korean market features limited participation by shareholders and pressuresensitive domestic institutions. Thus, we demonstrate the importance of corporate governance for firm innovation in emerging markets, where corporate innovation is increasingly important for long-term economic growth, competitiveness, and value creation.