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

72 Pages Posted: 20 Jan 2005 Last revised: 20 Nov 2018

See all articles by Bernard S. Black

Bernard S. Black

Northwestern University

Hasung Jang

Korea University - Department of Finance

Woochan Kim

Korea University Business School; European Corporate Governance Institute (ECGI); Asian Institute of Corporate Governance (AICG)

Multiple version iconThere are 3 versions of this paper

Date Written: June 2012


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.

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 t-statistics, rather than coefficients, in most of these instances, the t-statistics are higher than originally reported.


Keywords: Korea, corporate governance, corporate governance index, law and finance, firm valuation, board of directors, emerging markets

JEL Classification: G32, G34

Suggested Citation

Black, Bernard S. and Jang, Hasung and Kim, Woochan, Does Corporate Governance Predict Firms' Market Values? Evidence from Korea (June 2012). post-publication version, published in Journal of Law, Economics, and Organization, Vol. 22, No. 2, Fall 2006, European Corporate Governance Institute (ECGI) - Finance Working Paper No. 86/2005, KDI School of Pub Policy & Management Paper No. 02-04, McCombs Research Paper Series No. 02-05, Stanford Law and Economics Olin Working Paper No. 237, U of Texas law, Law and Econ Research Paper No. 26, Available at SSRN:

Bernard S. Black (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Hasung Jang

Korea University - Department of Finance ( email )

Seoul, 136-701
United States

Woochan Kim

Korea University Business School ( email )

LG-POSCO Bldg #524
Anam-Dong, Seongbuk-Ku
Seoul, Seoul 136701
+822-3290-2816 (Phone)
+822-922-7220 (Fax)


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Asian Institute of Corporate Governance (AICG) ( email )

1, 5-ga, Anam-dong
Seoul, 136-701
Korea, Republic of (South Korea)

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