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 language | English (US) |
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Pages (from-to) | 131-150 |
Number of pages | 20 |
Journal | Journal of Banking and Finance |
Volume | 51 |
DOIs | |
State | Published - Feb 1 2015 |
Funding
Data comes from various sources. We take balance sheet, income, cash flow statement data, foreign ownership data, related-party transactions, and original listing year from the TS2000 database maintained by the KLCA; adjusted return data from the Korea Securities Research Institute database; information on chaebol groups from annual reports by the KFTC; other stock market data from the Korea Stock Exchange; information on ADRs from JP Morgan and Citibank websites; and industry classification from the Korea Statistics Office. Share ownership comes from the KSE for financial institutions and from a hand-collected database for other firms.
Keywords
- Chaebols
- Corporate governance
- Korea
- Related-party transactions
- Self-dealing
- Tunneling
ASJC Scopus subject areas
- Finance
- Economics and Econometrics