Do Credit Ratings Concerns Lead to Better Corporate Governance? Evidence from Korea
51 Pages Posted: 30 Jun 2013 Last revised: 25 Oct 2016
Date Written: October 10, 2015
We exploit the 1997 Asian financial crisis to show that credit rating concerns affect firms’ corporate governance. We treat the crisis as an exogenous shock that led to improvements in the informativeness of Korea’s credit rating system and find that credit rating concerns affect corporate governance following the crisis, but not before the crisis. Moreover, this effect is concentrated in firms that are in chaebol business groups, consistent with their increased dependence on external financing. Finally, we find that firms that were particularly affected by the reforms demonstrate an increased reliance on debt that is dependent on credit ratings, consistent with our hypothesized effects of this exogenous shock. Our paper presents a novel approach to evaluate whether managers would improve their firms’ corporate governance in response to their credit rating concerns, and highlights the wide-ranging effects of reforms that are implemented due to financial crises.
Keywords: Credit Ratings, Corporate Governance, 1997 Asian Financial Crisis, Chaebol
JEL Classification: G24, G34, G01
Suggested Citation: Suggested Citation