How Corporate Governance Affects Firm Value: Evidence on Channels from Korea

53 Pages Posted: 20 Mar 2009 Last revised: 24 Jan 2012

Bernard S. Black

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

Woochan Kim

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

Hasung Jang

Korea University - Department of Finance

Kyung Suh Park

Korea University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 21, 2010

Abstract

Prior work in emerging markets provides evidence of an association between corporate governance and firm market value (based on the trading prices of minority shares), more limited evidence of a causal relationship, but very little evidence on the channels through which governance may affect firm behavior and therefore market value, and whether governance affects only the value of minority shares or also affects overall firm value. We first confirm the association between governance and the market value of Korean public companies in a firm fixed effects framework, using panel data 1998-2004. Firms with higher scores on an overall Korean corporate governance index (KCGI) have higher Tobin's q; this result is driven by the board structure subindex of KCGI and, less strongly, by ownership parity and disclosure subindices. Shareholder rights and board procedure subindices are not significant. We then provide evidence supporting two broad channels: Reduced insider self-dealing, and hence wealth transfer from controllers to outside shareholders; and improved firm performance, and hence higher overall firm value. For self-dealing, we find that for better-governed firms, related party transactions are less adverse to firm value and firm profitability is more sensitive to shocks to industry profitability. For overall firm value; we find that for better-governed firms (i) capital expenditures and sales growth are lower, but investment is more sensitive to profitability; (ii) profitability is more sensitive to growth opportunities; (iii) dividends are higher, controlling for profits, and are more sensitive to profits. In addition, lagged board structure is associated with higher firm profitability. Board structure subindex is associated with all results except those for dividends. A 2SLS analysis (using 1999 legal rules which apply only to large firms to instrument for board structure) offers evidence that the link between board structure and these channels is likely to be causal.

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

JEL Classification: G32, G34

Suggested Citation

Black, Bernard S. and Kim, Woochan and Jang, Hasung and Park, Kyung Suh, How Corporate Governance Affects Firm Value: Evidence on Channels from Korea (October 21, 2010). ECGI - Finance Working Paper No. 103/2005; KDI School of Pub Policy & Management Paper No. 08-19; Northwestern Law & Econ Research Paper No. 09-23; U of Texas Law, Law and Econ Research Paper No. 51; McCombs Research Paper Series No. 01-05. Available at SSRN: https://ssrn.com/abstract=1365945 or http://dx.doi.org/10.2139/ssrn.1365945

Bernard S. Black (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-2784 (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

Woochan Kim

Korea University Business School ( email )

LG-POSCO Bldg #524
Anam-Dong, Seongbuk-Ku
Seoul, Seoul 136701
+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)

Hasung Jang

Korea University - Department of Finance ( email )

Seoul, 136-701
United States

Kyung Suh Park

Korea University - Department of Finance ( email )

Seoul, 136-701
United States

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