The Effect of Monitoring Improvement and Suggestions for Security Selection of Corporate Governance Funds: Evidence from Korea

Abstract

This study focuses on the improvement effect of corporate governance (especially independent monitoring) on firm value. We aim to theoretically identify, by setting up a model, the companies that show greater increase in value as a result of monitoring improvement, and confirm these results empirically. Initially, the tunneling behavior of managers is drawn through the theoretical model in relation to different monitoring levels. Subsequently, the expected cash flow of the company and default probability from those behaviors is also identified. In addition, the numerical solution of the model is drawn in terms of the increase in firm value after the enhancement of the monitoring level; the characteristics of such companies can actually be observed. In other words, this study confirms that the impact of monitoring improvement on firm value is greater in companies with high stock volatility (or with low managerial compensation) and a low level of monitoring during the previous year. Based on these results, this study verifies the relationship between monitoring improvement and firm value empirically, and thus it is expected to contribute to the security selection of corporate governance funds.

Institutional Monitoring Of Sticky CEO Compensation

“…Higher institutional ownership increases the threat of derivative litigation and, in some cases, the board's ability to vote against executive stock option plans when the firm underperforms. 8 Related studies (Morck, Shleifer & Vishny, 1988;McConnell & Servaes, 1990;Burkart et al, 1997;Woidtke, 2002;Choi & Sias, 2012;Park et al, 2013) examine the relationship between institutional monitoring and firm value. For instance, Burkart et al (1997) find that large shareholders enhance firm value by monitoring agencies' errant behavior.…”

“…For instance, Burkart et al (1997) find that large shareholders enhance firm value by monitoring agencies' errant behavior. Park et al (2013) investigate institutional governance funds' improvement effects on firm value. In this regard, institutional investors, by substituting for managerial incentives, may restrain stock deterioration stemming from the moral hazard problem posed by sticky pay, even though they cannot directly control pay without performance.…”