The Effect of Board Structure on Firm Disclosure and Behavior: A Case Study of Korea and a Comparison of Research Designs

Abstract

We exploit a large legal shock to the board structure of Korean firms, using a strong research design – combined difference-in-differences and regression discontinuity – to study whether this board structure change affects firm financial reporting (disclosure, MD&A length, and abnormal accruals), investment and growth (sales growth and capital expenditures), and firm value (proxied by Tobin’s q). We also compare results from the annual DiD/RD design to those from simpler panel and “causal” methods, and assess how results vary across methods. We find robust evidence across methods that the shock predicts improved scores on a Disclosure Subindex, confirm prior findings of an increase in Tobin’s q, find some evidence for a drop in sales growth, but no convincing evidence of significant change for other outcomes. By comparing results across methods, we illustrate how using multiple causal designs can provide insight and evidence on robustness not available from a single design, as well as case study evidence that panel methods, simple DiD, and its close cousin, shock-based IV, can produce apparent false positives.

The Appendix can be downloaded without charge from SSRN at:
http://ssrn.com/abstract=3693354

Keywords: corporate governance, board structure, financial reporting quality, investment, sales growth, earnings management, accrual quality, audit committees, Korea, causal inference, panel data, difference-in-difference, instrumental variables, regression discontinuity.