Does corporate governance predict firms' market values? time series evidence from Korea

Title
Does corporate governance predict firms' market values? time series evidence from Korea
Authors
Black, Bernard S.Kim, Woochan
Keywords
Korea; corporate governance; corporate governance index; law and finance; firm valuation; board of directors; emerging markets
Issue Date
2006-04
Series/Report no.
KDI Working Paper Series;05-11
Abstract
Prior work on the connection between firm-level corporate governance and firm value, both in the U.S. and worldwide, relies on cross-sectional data. This leaves open the possibility that endogeneity or omitted firm-level variables explain the observed correlations. Korea provides a unique laboratory for addressing these empirical issues. Using panel data on the governance of Korean public companies over 1998-2003, we report time-series evidence that an overall corporate governance index is an important and likely causal factor in explaining these firms' market values. In prior cross-sectional work, Black, Jang, and Kim (2006) finds strong OLS and instrumental variable evidence that a Korean corporate governance index (KCGI) predicts higher firm market values, measured by ln(Tobin’s q) using 2001 data. Using their index extended over a seven-year period, we show here that the coefficient on KCGI remains significant and economically important over time and with firm random and fixed effects, which capture only the time-series variation of governance. When we decompose KCGI into subindices, subindices that reflect substantive governance are important; while procedure is not. Better-governed firms pay higher dividends than other firms, but do not report higher accounting profits.
URI
http://archives.kdischool.ac.kr/handle/11125/17063
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