The Effect of Board Structure on Firm Value in an Emerging Market: IV, DiD, and Time Series Evidence from Korea
- The Effect of Board Structure on Firm Value in an Emerging Market: IV, DiD, and Time Series Evidence from Korea
- Black, Bernard S.; Kim, Woochan
- Korea; outside directors; audit committees; corporate governance; board of directors
- Issue Date
- Series/Report no.
- KDI Working Paper Series;07-02
- 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.
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