We report strong OLS 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 (KCGI,
0~100) for 515 Korean companies based on a 2001 Korea Stock Exchange survey. In OLS,
a worst-to-best change in KCGI predicts a 0.47 increase in Tobin's q (about a 160%
increase in share price). This effect is statistically strong (t = 6.12) and robust
to choice of market value variable (Tobin's q, 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 KCGI.
Good instruments are not available in other comparable studies. Two-stage and three-stage
least squares coefficients are larger than OLS 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
q (roughly 40% higher share price), after controlling for the rest of KCGI. 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.