Does Corporate Governance Predict Firms' Market Values? Evidence from Korea

We report strong lt;igt;OLSlt;/igt; and instrumental variable evidence that an overall corporate governance index is an important and likely causal factor in explaining the market value of Korean public companies. We construct a corporate governance index (lt;igt;KCGIlt;/igt;, 0~100) for 515 Korean companies based on a 2001 Korea Stock Exchange survey. In lt;igt;OLSlt;/igt;, a worst-to-best change in lt;igt;KCGIlt;/igt; predicts a 0.47 increase in Tobin's lt;igt;qlt;/igt; (about a 160% increase in share price). This effect is statistically strong (lt;igt;tlt;/igt; = 6.12) and robust to choice of market value variable (Tobin's lt;igt;qlt;/igt;, market/book, and market/sales), specification of the governance index, and inclusion of extensive control variables.We rely on unique features of Korean legal rules to construct an instrument for lt;igt;KCGIlt;/igt;. Good instruments are not available in other comparable studies. Two-stage and three-stage least squares coefficients are larger than lt;igt;OLSlt;/igt; coefficients and are highly significant. Thus, this paper offers evidence consistent with a causal relationship between an overall governance index and higher share prices in emerging markets.We also find that Korean firms with 50% outside directors have 0.13 higher Tobin's lt;igt;qlt;/igt; (roughly 40% higher share price), after controlling for the rest of lt;igt;KCGIlt;/igt;. This effect, too, is likely causal. Thus, we report the first evidence consistent with greater board independence causally predicting higher share prices in emerging markets.Post-publication version. This version accompanies a replication dataset and replication statistical code (in Stata). In the course of replication, we found several instances where we could not fully replicate the published version; these are noted below. Changes from the original are marked. These instances do not affect the core results of the paper. Most affect lt;igt;tlt;/igt;-statistics, rather than coefficients, in most of these instances, the lt;igt;tlt;/igt;-statistics are higher than originally reported.Links