How corporate governance affect firm value? Evidence on a self-dealing channel from a natural experiment in Korea

Bernard Black, Woochan Kim*, Hasung Jang, Kyung Suh Park

*Corresponding author for this work

Research output: Contribution to journalArticle

36 Scopus citations

Abstract

Prior work in emerging markets provides evidence that better corporate governance predicts higher market value, but very little evidence on the specific channels through which governance can increase value. We provide evidence, from a natural experiment in Korea, that reduced tunneling is an important channel. Korean legal reform in 1999 changed the board structure of "large" firms (assets. >. 2 trillion won) relative to smaller firms. In event studies of the reform events, we show that large firms whose controllers have incentive to tunnel earn strong positive returns, relative to mid-sized firms. In panel regressions over 1998-2004, we also show that better governance moderates the negative effect of related-party transactions on value and increases the sensitivity of firm profitability to industry profitability (consistent with less tunneling).

Original languageEnglish (US)
Pages (from-to)131-150
Number of pages20
JournalJournal of Banking and Finance
Volume51
DOIs
StatePublished - Feb 1 2015

Keywords

  • Chaebols
  • Corporate governance
  • Korea
  • Related-party transactions
  • Self-dealing
  • Tunneling

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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