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Predicting firms' corporate governance choices : Evidence from Korea

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Frame of Image Social Science Research Network electronic library at: http://papers.ssrn.com/abstract=428662
Earlier versions of this paper were presented at Korea Development Institute Conference on Corporate Governance and the Capital Market in Korea, Korean Finance Association, McCombs School of Business at University of Texas, National Bureau of Economic Research Conference on Corporate Governance, and [to come]. We thank Wenton Zheng for research assistance, [names to come] and Franklin Allen, Kee Hong Bae, Yong-Seok Choi, Chang-Kyun Park, and [to come] for comments on earlier drafts. Hayden W. Head Regents Chair for Faculty Excellence and Professor of Law, University of Texas Law School, and Professor of Finance, Red McCombs School of Business, University of Texas. Tel: (+1) 512-471-4632, e-mail: bblack@law.utexas.edu Professor of Finance, Korea University Business School, Anam-Dong, Sungbuk-Ku, Seoul, Korea 136-701. Tel: (+82-2) 3290-1929, fax: (+82-2) 929-3405, e-mail: jangya@chollian.net Professor of Finance, KDI School of Public Policy and Management, Chongyangri-Dong Dongdaemun-Ku, Seoul, Korea 130-868. Tel: (+82-2) 3299-1030, fax: (+82-2) 968-5072, e-mail: wc_kim@kdischool.ac.kr
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Abstract
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 hi


Full Text
Title Predicting firms' corporate governance choices
Similar Titles
Sub Title

Evidence from Korea

Material Type Reports
Author(English)

Black, Bernard S. ; Jang, Hansung ; Kim, Woochan

Publisher

[Seoul]:KDI school of Public Policy and Management

Date 2004-08
Series Title; No Working Paper / 04-16
Pages 53
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Economy < Financial Policy
Industry and Technology < Entrepreneurship
Holding KDI school of Public Policy and Management

Abstract

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.