The Effect of Board Structure on Firm Value in an Emerging Market: IV, DiD, and Time Series Evidence from Korea

Title
The Effect of Board Structure on Firm Value in an Emerging Market: IV, DiD, and Time Series Evidence from Korea
Authors
Black, Bernard S.Kim, Woochan
Keywords
Korea; outside directors; audit committees; corporate governance; board of directors
Issue Date
2007-03
Series/Report no.
KDI Working Paper Series;07-02
Abstract
Outside directors and audit committees are widely considered to be central elements of good corporate governance. Yet evidence supporting this conventional wisdom is limited. Korea provides a unique laboratory for assessing whether there is a causal connection between board structure and firm value in an emerging market. Using a combination of instrumental variable analysis (relying on unique features of a 1999 Korean law which mandates 50% outside directors, an audit committee, and a director nominating committee for large public firms, but not for smaller public firms), difference-in-difference estimation, and firm fixed effects regressions, we report evidence of economically important share price increase for firms which adopt these board structure changes. Several years after the reforms, the profitability of large firms rises relative to unreformed small firms, suggesting that profitability might be one channel through which board independence affects firm value. We find similar gains for firms which are required to change board structure and smaller firms which voluntarily adopt these measures. At the same time, we find evidence of endogeneity, as well as sometimes large differences between pooled OLS and firm fixed effects estimates, thus confirming the potential unreliability of the cross-sectional OLS estimates relied on in most prior work.
URI
http://archives.kdischool.ac.kr/handle/11125/17101
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