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Why Does Corporate Governance Affect Firm Value: Evidence on a Self-Dealing Channel from a Natural Experiment in Korea

57 Pages Posted: 9 Nov 2005 Last revised: 12 Feb 2017

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); Asia Corporate Governance Institute (AICG)

Hasung Jang

Korea University - Department of Finance

Kyung Suh Park

Korea University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2015

Abstract

Prior work in emerging markets provides evidence that better corporate governance predicts higher market value, but very little on the specific channels through which governance increases value. We provide evidence, from a natural experiment in Korea, that reduced tunneling can be an important channel. Korean legal reform in 1999 improved board independence of “large” firms (assets > 2 trillion won) relative to smaller firms. This shock to governance allows us to assess the effects of reform using a regression discontinuity design. In event studies of the reform events, we show that large firms whose controllers have incentive to tunnel (positive Expropriation Risk Index firms) earn strong positive returns, relative to other large firms. In panel regressions over 1998-2004, we also show that better governance (higher Korea Corporate Governance Index) moderates the negative effect of related-party transactions on value and increases the sensitivity of firm profitability to industry profitability (consistent with less tunneling).

In a companion paper, Bernard Black and Woochan Kim, The Effect of Board Structure on Firm Value: A Multiple Identification Strategy Approach Using Korean Data (working paper 2008), http://ssrn.com/abstract=968287, we seek to identify Korean board structure reforms as likely causing an increase in firm market value.

For our earlier cross-sectional research on Korean corporate governance, see:

Bernard Black, Hasung Jang and Woochan Kim, Does Corporate Governance Affect Firms' Market Values? Evidence from Korea,: 22 Journal of Law, Economics and Organization 366-413 (2006), nearly final version at http://ssrn.com/abstract=311275.

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.

Keywords: Korea, corporate governance, corporate governance index, law and finance, firm valuation, board of directors, emerging markets

JEL Classification: G12, G32, G34

Suggested Citation

Black, Bernard S. and Kim, Woochan and Jang, Hasung and Park, Kyung Suh, Why Does Corporate Governance Affect Firm Value: Evidence on a Self-Dealing Channel from a Natural Experiment in Korea (December 1, 2015). Journal of Banking and Finance, Vol. 51, 2015, pp. 131-150; EFA 2009 Bergen Meetings Paper; ECGI - Finance Working Paper No. 103/2005; U of Texas Law, Law and Econ Research Paper No. 51; McCombs Research Paper No. 01-05; KDI School of Pub Policy & Management Paper No. 08/19. Available at SSRN: https://ssrn.com/abstract=844744 or http://dx.doi.org/10.2139/ssrn.844744

Bernard S. Black (Contact Author)

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

Asia Corporate Governance Institute (AICG) ( email )

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

Hasung Jang

Korea University - Department of Finance ( email )

Seoul, 136-701
United States

Kyung Suh Park

Korea University - Department of Finance ( email )

Seoul, 136-701
United States

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