Does corporate governance predict firms' market values? time series evidence from Korea
- Does corporate governance predict firms' market values? time series evidence from Korea
- Black, Bernard S.; Kim, Woochan
- Korea; corporate governance; corporate governance index; law and finance; firm valuation; board of directors; emerging markets
- Issue Date
- Series/Report no.
- KDI Working Paper Series;05-11
- 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.
- Files in This Item:
Items in DSpace are protected by copyright, with all rights reserved, unless otherwise indicated.