Companies tend to shift their financial strategy toward hoarding cash rather than expanding investment after disclosing that they have been indicted on breach-of-trust charges, according to a new study. The analysis suggests that as the burden of potential legal liability grows, firms may avoid risk-taking decisions such as new ventures or investments.
The Federation of Korean Industries (FKI) released the report, titled "The Effect of Applying Breach-of-Trust Law on Corporate Risk Aversion," on the 26th. It was commissioned to Ji In-yeop, a professor of economics at Dongguk University.
The researchers analyzed the financial data of 119 listed companies that disclosed breach-of-trust indictments between 2016 and this year. They found that in the quarter a company disclosed such an indictment, its cash holding ratio rose 1.7 percentage points from the previous quarter. The increase widened further to 3.1 percentage points after one quarter and reached 5.4 percentage points seven quarters later. Given that the average cash holding ratio of the companies analyzed was 12.0%, a rise of 5.4 percentage points is considered a substantial figure.
The cash holding ratio is the share of cash and cash-equivalent assets in a company's total assets. It shows how much of a company's holdings are in cash that can be drawn on immediately.
The FKI interpreted this as a result of companies becoming more inclined to hold safe cash rather than actively invest after breach-of-trust indictments. Cash is a representative low-risk asset. Companies usually find it difficult to change their cash holdings significantly over a short period because of investment plans and funding schedules. The fact that the share of cash rose for an extended period after indictment therefore suggests that financial policy itself may have turned conservative, according to the FKI.
The FKI also pointed to the vague standards for applying breach-of-trust law as a factor raising uncertainty in corporate management. From 2015 to 2024, the average first-trial acquittal rate for breach-of-trust and embezzlement cases was 6.2%, more than double the 3.0% average for all criminal cases.
The level of punishment was also cited as a problem. In South Korea, if the gains from a breach of trust amount to 5 billion won or more, the Act on the Aggravated Punishment of Specific Economic Crimes allows for a sentence of life imprisonment or a prison term of at least five years.
The report explained that the United States and the United Kingdom have no separate breach-of-trust provisions, while Germany and Japan apply a business judgment rule that broadly protects executives' reasonable decisions.
The business judgment rule is a system under which executives are not immediately held liable, even if a company ends up suffering losses, provided they made their decision through a reasonable process based on sufficient information. The intent is that because the outcome of investing in a new venture cannot be known in advance, a mechanism is needed to distinguish ordinary failure from deliberate breach of trust.
Lee Sang-ho, head of the FKI's economic affairs division, said the study empirically confirmed that breach-of-trust indictments can dampen corporate innovation and investment regardless of the final verdict of guilt or innocence. Lee added that it is urgent to clarify the elements of the breach-of-trust offense and to write the business judgment rule into law.
