SSRN-Corporate Governance and Firm Value: Endogeneity-Free Evidence from Korea by JungYong Choi, Dong Lee, Kyung Suh Park

Got thinking about class notes for the next semester today. One area where I wanted to firm up a bit was to get some new evidence that governance matters. I guess it was my lucky day since after looking at only 4 papers, I found this interesting piece by Choi, Lee, and Park. They look at the impact of buying by the Korean Governance Fund (a fund who claims to buy firms with poor governance and then improve governance in order to ern the positive returns associated with improved governance.

SSRN-Corporate Governance and Firm Value: Endogeneity-Free Evidence from Korea by JungYong Choi, Dong Lee, Kyung Suh Park:

“…unique experimental setting arises from the first target announcement of the so-called Korean Corporate Governance Fund. Since it has a stated goal of investing in companies whose stocks are undervalued due to governance problems and generating profits by actively addressing those problems, its target announcement serves as an exogenous shock to other firms that makes their stocks re-evaluated as a potential target based on the gains, if any, from improving the quality of their governance”

The findings? Governance matters!

A few look-ins:

Main finding:

“We find that, among other firms, those companies whose governance structure empowers corporate insiders at the expense of outside shareholders experience a more positive stock price reaction to the Fund’s first target announcement. This result is consistent with the existence of potential gains to outside shareholders from improving governance of those other firms”

How they measure governance:

“[The authors] measure the quality of governance using an index of 11 governance provisions…. However, to ensure that our results are not specific to those provisions, we employ two alternative indices,”

Does it matter?

“Figure 1 attests to the economic significance of the target announcement. The two announced targets, which themselves are a poorly governed company and thus confirm the stated strategy of the Fund, respectively experienced more than 70 and 120 percent stock price increases over the first several days alone after the announcement. This implies that the expected profits from correctly predicting the next targets were enormous among Korean investors”

Interesting…and definitely consistent with the earlier work of Black , Jang, and Kim. So yes it will be included in class notes 🙂

Choi, JungYong, Lee, Dong Wook and Park, Kyung Suh, “Corporate Governance and Firm Value: Endogeneity-Free Evidence from Korea” (July 9, 2007). Available at SSRN: