Does Corporate Governance Predict Firms' Market Values? Evidence from Korea
Bernard S. Black
Northwestern University - Pritzker School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI)
Korea University - Department of Finance
Korea University Business School; European Corporate Governance Institute (ECGI); Asia Corporate Governance Institute (AICG)
June 1, 2005
nearly final pre-publication version, published in Journal of Law, Economics & Organization 22, 366-413 (2006)
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.
For a post-publication version of this article, which corrects several small errors found during replication, as well as a replication dataset and statistical code, see http://ssrn.com/abstract=311275.
In a companion paper, Bernard Black, Hasung Jang & Woochan Kim, Predicting Firms' Corporate Governance Choices: Evidence from Korea, 12 Journal of Corporate Finance 660-691 (2006), nearly final version at http://ssrn.com/abstract=428662, we examine the factors which predict firms' governance choices.
For our related, subsequent work with panel data on Korean governance, see:
Bernard Black and Woochan Kim, The Effect of Board Structure on Firm Value: A Multiple Identification Strategy Approach Using Korean Data, 104 Journal of Financial Economics 203-226 (2012), nearly final version at http://ssrn.com/abstract=968287 (stronger identification of the causal effect of board structure reforms on firm market value).
Bernard Black, Woochan Kim, Hasung Jang and Kyung-Suh Park, How Corporate Governance Affects Firm Value: Evidence on Channels from Korea (working paper 2012), http://ssrn.com/abstract=844744 (studying the channels through which governance may affect firm market value).
Number of Pages in PDF File: 73
Keywords: Korea, corporate governance, corporate governance index, law and finance, firm valuation, board of directors, emerging markets
JEL Classification: G32, G34
Date posted: June 29, 2012 ; Last revised: July 11, 2012