Abstract

http://ssrn.com/abstract=311275
 
 

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


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

Woochan Kim


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

2006

post-publication version, published in Journal of Law, Economics, and Organization, Vol. 22, No. 2, Fall 2006
ECGI - Finance Working Paper No. 86/2005
KDI School of Pub Policy & Management Paper No. 02-04
McCombs Research Paper Series No. 02-05
Stanford Law and Economics Olin Working Paper No. 237
U of Texas law, Law and Econ Research Paper No. 26

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 paper 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.

Post-publication version. This version accompanies a replication dataset and replication statistical code (in Stata). In the course of replication, we found several instances where we could not fully replicate the published version; these are noted below. Changes from the original are marked. These instances do not affect the core results of the paper. Most affect t-statistics, rather than coefficients, in most of these instances, the t-statistics are higher than originally reported.

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Number of Pages in PDF File: 66

Keywords: Korea, corporate governance, corporate governance index, law and finance, firm valuation, board of directors, emerging markets

JEL Classification: G32, G34

Accepted Paper Series


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Date posted: January 20, 2005 ; Last revised: June 18, 2013

Suggested Citation

Black, Bernard S. and Jang, Hasung and Kim, Woochan, Does Corporate Governance Predict Firms' Market Values? Evidence from Korea (2006). post-publication version, published in Journal of Law, Economics, and Organization, Vol. 22, No. 2, Fall 2006; ECGI - Finance Working Paper No. 86/2005; KDI School of Pub Policy & Management Paper No. 02-04; McCombs Research Paper Series No. 02-05; Stanford Law and Economics Olin Working Paper No. 237; U of Texas law, Law and Econ Research Paper No. 26. Available at SSRN: http://ssrn.com/abstract=311275

Contact Information

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
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)
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References:  34
Citations:  115

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