Outsider Board Activity, Ownership Structure and Firm Value: Evidence from Korea

Abstract

Using a sample of publicly listed firm in Korea from 2002 to 2006, this article examines the impact of board monitoring on firm value and productivity. We use outsider's attendance of board meetings as a proxy for board monitoring. Consistent with the commitment hypothesis, we find that outsider's attendance rate increases firm value, suggesting that attending board meeting itself is a strong signal that reflects outsider's intention to monitor insiders. While ownership of controlling shareholders negatively affects firm value, this relationship is not moderated by increased monitoring by outsiders. Our findings provide further evidence that the outside director system is less effective in chaebol-affiliated firms. Results also indicate that the effect of outsider's board monitoring activity on investor's valuation of the firm is greater than on productivity improvement of the firm. Our conclusions are robust for possible endogeneity in the relationship between firm value and board attendance by outside directors.

A simple template for pitching research

“…Recent interesting examples of single country studies in the broad area of finance and accounting research are Carrera and Carmona () – Spain; Duong and Izan () – Australia; Hao et al . () – China; Min and Verhoeven () – Korea; Takeda and Wakao () – Japan; Tarca et al . () – Germany; and Yeh et al .…”

Corporate Leverage Strategy in an Emerging Market

“…We chose the OD/BOD variable as a proxy for good governance for the following two reasons. First, the introduction of the outside director system was one of the material changes following the 1997 crisis, and is similar to the strengthened requirement for independent directors in the US following the Sarbane-Oxley Act of 2002 (Choi, Park and Yoo, 2007;Min and Verhoeven, 2013). Secondly, the outside director data published by KLCA is less susceptible to measurement error than the alternative survey-based index numbers for overall quality of corporate governance (Black and Kim, 2012;Black, Jang and Kim, 2006).…”

Determinants of board size in an emerging market

“…The 1997 Asian financial crisis has also highlighted the idea of introducing outside directors into the board system in the Asian region (Bourbakri, Guedhami, & Mishra, ; Min & Smyth, ; Min & Verhoeven, ; Mitton, ; Organisation for Economic Co‐operation and Development, ) . These regulatory reforms stipulate that listed firms must appoint external directors, which in turn affects board size.…”

“…The Korean case is unique in that government‐led reforms have significantly changed the corporate governance system since the onset of the 1997 Asian financial crisis (Becht et al., ; Black & Kim, ; Chizema & Kim, ; Kim & Kim, ; Min & Bowman, ; Organisation for Economic Co‐operation and Development, ). The essence of the governance reform is the introduction of the Anglo‐American model which includes the outside director system (Min & Smyth, ; Min & Verhoeven, ). The appointment of outside directors directly affects board size.…”

“…Most existing studies on Korea focus on the financial performance of chaebols before the 1997 Asian crisis (Bae, Kang, & Kim, ; Joh, ). Researchers have examined the effect of the outside director system on firm performance such as the Tobin's q and share returns (Black, Jang, & Kim, 2006b; Choi, Park, & Yoo, ; Min, ; Min & Verhoeven, ). Black, Jang, and Kim (2006a), using the corporate governance index, reported that regulation is an important determinant of firms’ corporate governance choices.…”