Abstract

http://ssrn.com/abstract=1098690
 
 

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Does Corporate Governance Predict Firms' Market Values? Evidence from Korea


Woochan Kim


Korea University Business School; European Corporate Governance Institute (ECGI); Asia Corporate Governance Institute (AICG)

Bernard S. Black


Northwestern University - School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI)

Hasung Jang


Korea University - Department of Finance

October 2006

The Journal of Law, Economics, and Organization, Vol. 22, Issue 2, pp. 366-413, 2006

Abstract:     
We report strong OLS and instrumental variable evidence that an overall corporate governance index is an important and likely causal factor in explaining the market value of Korean public companies. We construct a corporate governance index (KCGI, 0~100) for 515 Korean companies based on a 2001 Korea Stock Exchange survey. In OLS, a worst-to-best change in KCGI predicts a 0.47 increase in Tobin's q (about a 160% increase in share price). This effect is statistically strong (t = 6.12) and robust to choice of market value variable (Tobin's q, market/book, and market/sales), specification of the governance index, and inclusion of extensive control variables. We rely on unique features of Korean legal rules to construct an instrument for KCGI. Good instruments are not available in other comparable studies. Two-stage and three-stage least squares coefficients are larger than OLS coefficients and are highly significant. Thus, this article offers evidence consistent with a causal relationship between an overall governance index and higher share prices in emerging markets. We also find that Korean firms with 50% outside directors have 0.13 higher Tobin's q (roughly 40% higher share price), after controlling for the rest of KCGI. This effect, too, is likely causal. Thus, we report the first evidence consistent with greater board independence causally predicting higher share prices in emerging markets.

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Date posted: February 29, 2008  

Suggested Citation

Kim, Woochan and Black, Bernard S. and Jang, Hasung, Does Corporate Governance Predict Firms' Market Values? Evidence from Korea (October 2006). The Journal of Law, Economics, and Organization, Vol. 22, Issue 2, pp. 366-413, 2006. Available at SSRN: http://ssrn.com/abstract=1098690 or http://dx.doi.org/10.1093/jleo/ewj018

Contact Information

Woochan Kim
Korea University Business School ( email )
LG-POSCO Bldg #524
Anam-Dong, Seongbuk-Ku
Seoul, Seoul 136701
Korea
+822-3290-2816 (Phone)
+822-922-7220 (Fax)
HOME PAGE: http://biz.korea.ac.kr/professor/wckim
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Asia Corporate Governance Institute (AICG) ( email )
1, 5-ga, Anam-dong
Sungbuk-gu
Seoul, 136-701
Korea, Republic of (South Korea)
Bernard S. Black (Contact Author)
Northwestern University - School of Law ( email )
375 E. Chicago Ave
Unit 1505
Chicago, IL 60611
United States
512-503-2784 (Phone)

Northwestern University - Kellogg School of Management
2001 Sheridan Road
Evanston, IL 60208
United States
847-491-5049 (Phone)
European Corporate Governance Institute (ECGI)
Brussels
Belgium
Hasung Jang
Korea University - Department of Finance ( email )
Seoul, 136-701
Korea
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