This paper contributes to a new literature on the factors that affect firms' corporate
governance practices. We find that regulatory factors are highly important, largely
because Korean rules impose special governance requirements on large firms (assets
> 2 trillion won). Industry factors, firm size, and firm risk are also important.
Other firm-specific factors only modestly affect governance even when they are statistically
significant. This suggests 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) and firm risk (riskier firms are better governed).
Long-term averages of profitability and equity finance need are significant, where
short-term averages are not. This is consistent with sticky governance, in which
firms alter their governance slowly in response to economic factors.
In a companion paper, we report evidence that the corporate governance index used
here predicts higher share prices for Korean firms. Black, Jang and Kim, Does Corporate
Governance Affect Firms' Market Values? Evidence from Korea,: Journal of Law, Economics
and Organization (forthcoming 2005), http://ssrn.com/abstract=311275