This paper contributes to a new literature on how regulatory, industry, and economic factors affect firms'
corporate governance practices. Black, Jang and Kim (2004) construct a corporate governance index
(KCGI) for almost all listed Korean public companies and report evidence that higher KCGI strongly
predicts higher firm market values and that this effect is likely causal. In this paper, armed with this
strong index, we investigate the factors that predict a firm's score on KCGI and the five subindices that
comprise KCGI (shareholder rights, board structure, board procedure, disclosure to investors, and
ownership parity). We explore the relative importance of regulatory, industry, and firm-specific factors.
Regulatory factors are highly important, largely because Korean rules impose special governance
requirements on large firms (assets > 2 trillion won). Industry factors and firm size are also important.
Firm-specific factors (other than size) are less important and only modestly affect governance even when
they are statistically significant. These results suggest that many Korean firms do not choose their
governance to maximize share price.
Among firm-specific factors, the most significant are size (larger firms are better governed), firm risk
(riskier firms are better governed), long-term profitability (more profitable small firms are worse
governed), and equity finance need (which combines growth and profitability) (small firms with higher
equity finance need are better governed). Long-term averages of growth, profitability and equity finance
need are stronger than short-term averages, consistent with firms altering governance slowly in response
to economic factors. Firm growth and ownership by the largest shareholder are not reliably significant,
in contrast to results from other studies.
Predicting firms' corporate governance choices
Evidence from Korea
[Seoul]:KDI school of Public Policy and Management
|Series Title; No||Working Paper / 04-16|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Financial Policy
Industry and Technology < Entrepreneurship
|Holding||KDI school of Public Policy and Management|