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How corporate governance affect firm value? Evidence on a self-dealing channel from a natural experiment in Korea
Institution:1. Coventry Business School, Coventry University, Priory Street, Coventry CV1 5FB, UK;2. Bangor Business School, Bangor University, Bangor, Gwynedd LL57 2DG, UK;1. Santa Clara University, 500 El Camino Real, 95053 Santa Clara, CA, USA;2. CREST (ENSAE), 3, Avenue Pierre Larousse, 92245, Malakoff Cedex, France;3. University of Cambridge, Trumpington Street, Cambridge CB2 1AG, United Kingdom;1. Northwestern University, School of Law and Kellogg School of Management, 375 E. Chicago Ave, Chicago, IL 60611, United States;2. FGV-EAESP, Av Nove de Julho, 2029 — Sala 912, São Paulo, SP 01313-902, Brazil
Abstract:Prior work in emerging markets provides evidence that better corporate governance predicts higher market value, but very little evidence on the specific channels through which governance can increase value. We provide evidence, from a natural experiment in Korea, that reduced tunneling is an important channel. Korean legal reform in 1999 changed the board structure of “large” firms (assets > 2 trillion won) relative to smaller firms. In event studies of the reform events, we show that large firms whose controllers have incentive to tunnel earn strong positive returns, relative to mid-sized firms. In panel regressions over 1998–2004, we also show that better governance moderates the negative effect of related-party transactions on value and increases the sensitivity of firm profitability to industry profitability (consistent with less tunneling).
Keywords:Corporate governance  Related-party transactions  Tunneling  Self-dealing  Korea
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