Does Corporate Governance Predict Firms' Market Values? Evidence from Korea
Does Corporate Governance Predict Firms' Market Values? Evidence from Korea
By Woochan Kim, Bernard S Black , and Hasung Jang
The Journal of Law, Economics, & Organization (2006)
Abstract Paper

Woochan Kim

Korea University Business School

South Korea

Coder Page  

Bernard S Black

Northwestern University

United States

Coder Page  

Hasung Jang

Korea University Business School

South Korea

Coder Page  

This code allows the user evaluating the robustness of the relationship found between an overall corporate governance index and the market value of Korean public companies. The sample includes 515 Korean companies based on a 2001 Korea Stock Exchange survey (the dataset can be downloaded). The user can choose the dependent variable (Tobin’s q, Market / Book, Market / Sales) and a set of control explicative variables. The corporate governance index (KCGI) is systemically introduced in the specification. The user can also define some restrictions on the sample used (see, Table 5, page 382). The code systematically displays both OLS estimates and instrumental variable (asset size dummy is automatically introduced).
Created
July 20, 2012
Software:
Stata 11.2
Visits
150
Last update
October 08, 2012
Ranking
5
Runs
39
Code downloads
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Data downloads
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Abstract
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 KCGIpredicts 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.
Kim, W., B. S. Black , and H. Jang, "Does Corporate Governance Predict Firms' Market Values? Evidence from Korea", The Journal of Law, Economics, & Organization , 22, 366-413.
Dependent Variable
Dependent Variable
Sample
Sample
Industry Dummies
Industry Dummies
Explicative Variables
Explicative Variables
ADR (level1) Dummy
ADR (level2(3)) Dummy
Advertising / Sales
Bank dummy
Book Value of Assets
Book Value of Debt
Book Values of Common Stock
Capex / Sales
Chaebol30 dummy
Debt / Assets
Debt / Equity
EBIT / Sales
Export / Sales
Foreign ownership
Ln(assets)
Ln(years isted)
Market Share
Market Value of Common Stock
MSCI index dummy
PPE / Sales
PPE sales²
R&D / Sales
Sales
Sales Growth
Share turnover
Sole ownership
Sole ownership²
Years Listed
Table
Table
Figure
Figure
Figure 1
Figure 2
Figure 3
Figure 4
Figure 5
Waiting time

Please cite the publication as :

Kim, W., B. S. Black , and H. Jang, "Does Corporate Governance Predict Firms' Market Values? Evidence from Korea", The Journal of Law, Economics, & Organization , 22, 366-413.

Please cite the companion website as :

Kim, W., B. S. Black , and H. Jang, "Does Corporate Governance Predict Firms' Market Values? Evidence from Korea", RunMyCode companion website, http://www.execandshare.org/CompanionSite/Site150

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Variable/Parameters Description, constraint Comments
Dependent Variable
    The user can choose the market value variable used as dependent variable in the regression: Tobin’s q, Market / Book, and Market / Sales. The Tobin’s is estimated as market value of assets as [book value of debt + book value of preferred stock + market value of common stock]/book value of assets. The Market / Book variable corresponds to (Market value of common stock)/(book value of common stock). The Market / Sales variable corresponds to (Market value of assets)/sales.
    Sample
      The user can put some restrictions on the sample used for the regression (see. Table5, page 382).
      Industry Dummies
        The user can include no dummies, two-digit industry dummies or four-digit industry dummies in the regression.
        Explicative Variables
          The user can choose the explactive variables used in the regression. For more details, please see Table 2, page 374. Note that the overall index (KCGI) is always included as explicative.
          Table
            Generate tables 4 or 5.
            Figure
              Generate figures 1-5.
              Variable/Parameters Description Visualisation
              Dependent Variable The dependent variable used is the demo dataset is the Tobin's q.
              Sample The data used in the demo corresponds to the entire sample.
              Industry Dummies The demo regression includes fourdigit industry dummies.
              Explicative Variables This regression corresponds to the results reported in column two, Table 4 page 381.
              Table
              Figure
              Does Corporate Governance Predict Firms' Market Values? Evidence from Korea
              W. Kim, B. S. Black , and H. Jang (2012)
              Computing Date Status Actions
              Coders:
              • Woochan Kim

                Korea University Business School

                South Korea

              • Bernard S Black

                Northwestern University

                United States

              • Hasung Jang

                Korea University Business School

                South Korea

              Woochan Kim also created these companion sites

              Bernard S Black also created these companion sites

              Hasung Jang also created these companion sites

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

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              Runs
              N.A.
              Visits
              45
              Outliers and GARCH Models in Financial Data
              Abstract
              We propose to extend the additive outlier (AO) identification procedure developed by Franses and Ghijsels(Franses, P.H., Ghijsels, H., 1999. Additive outliers, GARCH and forecasting volatility. International Journal of Forecasting, 15, 1–9) to take into account the innovative outliers (IOs) in a GARCH model. We apply it to three daily stock market indexes and examine the effects of outliers on the diagnostics of normality.
              Charles, A., and O. Darné, D. Banulescu, E. Dumitrescu, "Outliers and GARCH Models in Financial Data", Economics Letters, 86, 347-352.
              Authors: Charles
              Darné
              Coders: Charles
              Darné
              Banulescu
              Dumitrescu
              Last update
              06/22/2012
              Ranking
              15
              Runs
              61
              Visits
              238
              The level and quality of Value-at-Risk disclosure by commercial banks
              Abstract
              In this paper we study both the level of Value-at-Risk (VaR) disclosure and the accuracy of the disclosed VaR figures for a sample of US and international commercial banks. To measure the level of VaR disclosures, we develop a VaR Disclosure Index that captures many different facets of market risk disclosure. Using panel data over the period 1996–2005, we find an overall upward trend in the quantity of information released to the public. We also find that Historical Simulation is by far the most popular VaR method. We assess the accuracy of VaR figures by studying the number of VaR exceedances and whether actual daily VaRs contain information about the volatility of subsequent trading revenues. Unlike the level of VaR disclosure, the quality of VaR disclosure shows no sign of improvement over time. We find that VaR computed using Historical Simulation contains very little information about future volatility.
              Perignon, C., and D. Smith, "The level and quality of Value-at-Risk disclosure by commercial banks", Journal of Banking and Finance, 34.
              Authors: Perignon
              Smith
              Coders: Perignon
              Smith
              Last update
              11/23/2012
              Ranking
              9999
              Runs
              N.A.
              Visits
              25
              Extracting Factors from Heteroskedastic Asset Returns
              Abstract
              This paper proposes an alternative to the asymptotic principal components procedure of Connor and Korajczyk (Journal of Financial Economics, 1986) that is robust to time series heteroskedasticity in the factor model residuals. The new method is simple to use and requires no assumptions stronger than those made by Connor and Korajczyk. It is demonstrated through simulations and analysis of actual stock market data that allowing heteroskedasticity sometimes improves the quality of the extracted factors quite dramatically. Over the period from 1989 to 1993, for example, a single factor extracted using the Connor and Korajczyk method explains only 8.2% of the variation of the CRSP value-weighted index, while the factor extracted allowing heteroskedasticity explains 57.3%. Accounting for heteroskedasticity is also important for tests of the APT, with p-values sometimes depending strongly on the factor extraction method used.
              Jones, S. C., "Extracting Factors from Heteroskedastic Asset Returns", Journal of Financial Economics, 62, 293-325.
              Authors: Jones
              Coders: Jones
              Last update
              11/17/2012
              Ranking
              30
              Runs
              17
              Visits
              81
              A New Approach to Comparing VaR Estimation Methods
              Abstract
              We develop a novel backtesting framework based on multidimensional Value-at-Risk (VaR) that focuses on the left tail of the distribution of the bank trading revenues. Our coverage test is a multivariate generalization of the unconditional test of Kupiec (Journal of Derivatives, 1995). Applying our method to actual daily bank trading revenues, we find that non-parametric VaR methods, such as GARCH-based methods or filtered Historical Simulation, work best for bank trading revenues.
              Perignon, C., and D. Smith, "A New Approach to Comparing VaR Estimation Methods", Journal of Derivatives, Winter.
              Authors: Smith
              Perignon
              Coders: Perignon
              Smith
              Last update
              11/23/2012
              Ranking
              9999
              Runs
              N.A.
              Visits
              43
              A Generalized Asymmetric Student-t Distribution with Application to Financial Econometrics
              Abstract
              This paper proposes a new class of asymmetric Student-t (AST) distributions, and investigates its properties, gives procedures for estimation, and indicates applications in financial econometrics. We derive analytical expressions for the cdf, quantile function, moments, and quantities useful in financial econometric applications such as the Expected Shortfall. A stochastic representation of the distribution is also given. Although the AST density does not satisfy the usual regularity conditions for maximum likelihood estimation, we establish consistency, asymptotic normality and efficiency of ML estimators and derive an explicit analytical expression for the asymptotic covariance matrix. A Monte Carlo study indicates generally good finite-sample conformity with these asymptotic properties.
              Colletaz, G., "A Generalized Asymmetric Student-t Distribution with Application to Financial Econometrics", Journal of Econometrics, 157, 297-305.
              Authors: Zhu
              Galbraith
              Coders: Colletaz
              Last update
              05/05/2012
              Ranking
              38
              Runs
              6
              Visits
              95
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