The Effect of Board Structure on Firm Value in an Emerging Market: IV, DiD, and Time Series Evidence from Korea

摘要

Outside directors and audit committees are widely considered to be central elements of good corporate governance. Yet evidence supporting this conventional wisdom is limited. Korea provides a unique laboratory for assessing whether there is a causal connection between board structure and firm value in an emerging market. Using a combination of instrumental variable analysis (relying on unique features of a 1999 Korean law which mandates 50% outside directors, an audit committee, and a director nominating committee for large public firms, but not for smaller public firms), difference-in-difference estimation, and firm fixed effects regressions, we report evidence of economically important share price increase for firms which adopt these board structure changes. Several years after the reforms, the profitability of large firms rises relative to unreformed small firms, and the volume of asset sales to related parties declines, suggesting that these might be two possible channels through which board independence affects firm value. We find similar share price gains for firms which are required to change board structure and smaller firms which voluntarily adopt these measures. At the same time, we find evidence of endogeneity for smaller firms, as well as sometimes large differences between pooled OLS and firm fixed effects estimates, thus confirming the potential unreliability of the cross-sectional OLS estimates relied on in most prior work.