Applying Shock-Based versus Panel Data Methods in Corporate Finance and Accounting Research: Evidence from a Case Study of Korea

58 Pages Posted: 15 Sep 2012 Last revised: 23 Nov 2018

See all articles by Bernard S. Black

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); Asian Institute of Corporate Governance (AICG)

Julia Nasev

Ludwig-Maximilians-University Munich

Date Written: November 23, 2018

Abstract

Only rarely do researchers use multiple methods to study the same research question. We provide case-study evidence on the value of doing so, and the limited reliability of both panel methods and simpler causal designs, as guides to actual causation. We study the effect of 1999 Korean reforms, which required large firms (assets over 2 trillion won) to change their board structures, relative to smaller firms, on a number of finance and accounting outcomes which could be plausibly affected by this shock to governance: Tobin’s q, disclosure, investment, growth, and abnormal accruals. We first exploit the Korea shock using a combined difference-in-differences (DiD)/regression discontinuity (RD) design, with annual “leads and lags” estimates of the treatment effect. This design likely comes as close to a randomized experiment as one is likely to achieve, short of an actual experiment. With this design, the shock predicts an increase in a "Disclosure Subindex," but no significant change in other outcomes. We compare these “benchmark” results to those from simpler causal designs exploiting this shock (DiD, RD, and instrumental variables) and to classic panel designs. With panel methods, a Korea corporate governance index also predicts higher Tobin's q, slower growth, lower absolute abnormal accruals, and more extensive MD&A disclosure. However, only the Tobin's q results survive with simpler causal methods, and those weaken with our benchmark design. We thus provide case study evidence that panel methods can often provide apparent false positives; and simpler causal methods also tend, less strongly, to generate apparent false positives. We also illustrate how using multiple causal designs can provide insight not available from a single design.

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.

Suggested Citation

Black, Bernard S. and Kim, Woochan and Nasev, Julia, Applying Shock-Based versus Panel Data Methods in Corporate Finance and Accounting Research: Evidence from a Case Study of Korea (November 23, 2018). Northwestern Law & Econ Research Paper 12-13; ECGI - Finance Working Paper. Available at SSRN: https://ssrn.com/abstract=2133283 or http://dx.doi.org/10.2139/ssrn.2133283

Bernard S. Black

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

Asian Institute of Corporate Governance (AICG) ( email )

1, 5-ga, Anam-dong
Sungbuk-gu
Seoul, 136-701
Korea, Republic of (South Korea)

Julia Nasev (Contact Author)

Ludwig-Maximilians-University Munich ( email )

Geschwister-Scholl-Platz 1
Munich, 80539
Germany

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