Investor Reaction to the Stock Gifts of Controlling Shareholders

Abstract

The controlling shareholders of Korean firms usually attempt to pass on the firm to the next generation and stock gifts are the most evident form of the ownership transfer. I examine how equity market investors react to the announcement of stock gifts given by controlling shareholders. Prior literature documents evidence that controlling shareholders use their private information and discretionary power to time stock gifts at lower stock prices in order to reduce gift taxes. I observe significant positive excess returns when controlling shareholders transfer stocks to their related parties as gifts, suggesting that investors interpret stock gifts as a signal that stock prices are relatively low at the time of the transfer. The evidence implies that the disclosure of stock gifts reveals the private information of controlling shareholders. In addition, in order to explain the positive market reaction to the gift announcement, I show the economic significance of tax planning strategies conducted by controlling shareholders to reduce gift taxes.

Keywords: Stock gifts, gift taxes, market reaction, controlling shareholders