Debt, Maturity, and Corporate Governance: Evidence from Korea

Abstract

Using a unique survey data set, I examine how corporate governance practices of listed Korean firms can affect debt ratio and debt maturity structure. I find that firms with poor governance tend to have a higher debt ratio (especially short-term debt ratio) than firms with good governance. I also show that the documented relationships between corporate governance and debt ratio and between corporate governance and debt maturity are not significantly different between chaebol (Korean business group) and non-chaebol firms. These findings suggest that (short-term) debt financing can be used as a monitoring tool to mitigate agency problems because financial intermediaries monitor the managers of the borrowing firms. This study contributes to the corporate governance literature by providing evidence that debt capital, especially short-term debt, can be used as a complementary monitoring tool for poorly governed firms in an emerging economy.

Labor Union and Real Earnings Management

“…The labor unionization rate (RATE1) is a statistically and significantly positive association at the 1% level with proxies for the magnitude of real EM (ACFO, APC, RM1 and RM2) in non-chaebol groups only. As we expected, owner-managers of chaebol groups have ultimate power in Korea as discussed in prior literatures (Hwang et al 2013;Kim 2015), then owner-manager of the firm do not use real EM to boost upward earnings even though labor union require it. Also this empirical analyses show that labor union's strength is only effective in non-chaebol firms.…”

“…We included CHAEBOL as a control variable to control for the effect of corporate governance. In Korea, Chaebol firms have pyramidal ownership structures and the owner-managers of chaebol-affiliated groups retain ultimate power in the firm (Kim 2015), which would reduce the strength of the influence of a labor union on the owner-manager's economic decision making. We thus expect a negative association between CHAEBOL and Real EM.…”

“…Further, we divided our sample into two groups: chaebol and non-chaebol firms. Chaebol firms have pyramidal ownership structures and the owner-managers of chaebol-affiliated groups hold the ultimate power in their firms (Kim 2015). Thus, a labor union could have an effect on non-chaebol group firms especially because we expect that labor unions will have limited influence on the owner manager.…”

Is Short-Term Debt a Substitute or a Complement to Good Governance?

“…Using data from Turkey, Arslan and Karan (2006) show that both concentrated ownership structure and the presence of large shareholders are associated with the use of long-term debt. Kim (2015) finds that Korean firms with poor governance tend to have a 6 higher debt ratio (especially short-term debt ratio) than firms with good governance. Kirch and Terra (2012) analyze firm-level data from five South American countries and conclude that the institutional quality of a country has a significant positive effect on the level of long-term debt in a firm's financial structure.…”

Role of Corporate Governance and Lifecycle in Determining Payout Precommitment in an Emerging Economy

“…Our focus is on precommitment through corporate payout policy in an emerging market and this has received relatively little attention in the literature. Studies that analyse the relationship between corporate governance and payout policy tend to focus solely on dividend payouts (Hwang et al, 2013;Flavin and O'Connor, 2017;Goyal et al, 2020) or on debt (Kim, 2015;Goodell and Goyal, 2018), but not on the individual component of the total payouts. This paper goes beyond that and analyses not only the precommitment through dividends, but also precommitment through debt payments, share repurchases and various mixes of all three payout mechanisms.…”