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)
post-publication version, published in Journal of Law, Economics, and Organization, Vol. 22, No. 2, Fall 2006
ECGI - Finance Working Paper No. 86/2005
KDI School of Pub Policy & Management Paper No. 02-04
McCombs Research Paper Series No. 02-05
Stanford Law and Economics Olin Working Paper No. 237
U of Texas law, Law and Econ Research Paper No. 26
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.
Post-publication version. This version accompanies a replication dataset and replication statistical code (in Stata). In the course of replication, we found several instances where we could not fully replicate the published version; these are noted below. Changes from the original are marked. These instances do not affect the core results of the paper. Most affect t-statistics, rather than coefficients, in most of these instances, the t-statistics are higher than originally reported.
Number of Pages in PDF File: 66
Keywords: Korea, corporate governance, corporate governance index, law and finance, firm valuation, board of directors, emerging markets
JEL Classification: G32, G34
Date posted: January 20, 2005 ; Last revised: June 18, 2013