The effect of board structure on firm value : a multiple identification strategies approach using Korean data

Outside directors and audit committees are widely considered to be central elements of good corporate governance. We use a 1999 Korean law as an exogenous shock to assess how board structure affects firm market value. The law mandates 50% outside directors and an audit committee for large public firms, but not smaller firms. We study how this shock affects firm market value, using event study, difference-in-differences, and instrumental variable methods, within a regression discontinuity approach. The legal shock produces large share price increases for large firms, relative to mid-sized firms; share prices jump in 1999 when the reforms are announced.In a companion paper, Bernard Black, Woochan Kim, Hasung Jang and Kyung-Suh Park, How Corporate Governance Affects Firm Value: Evidence on Channels from Korea (working paper 2011), lt;a href=quot;http://ssrn.com/abstract=844744quot;gt;http://ssrn.com/abstract=844744lt;/agt;, we provide evidence on the channels through which governance may affect firm value. For our earlier cross-sectional research on Korean corporate governance, see:Bernard Black, Hasung Jang and Woochan Kim, Does Corporate Governance Affect Firms' Market Values? Evidence from Korea,: 22 Journal of Law, Economics and Organization 366-413 (2006), nearly final version at lt;a href=quot;http://ssrn.com/abstract=311275quot;gt;http://ssrn.com/abstract=311275lt;/agt;Bernard Black, Hasung Jang amp; Woochan Kim, Predicting Firms' Corporate Governance Choices: Evidence from Korea, 12 Journal of Corporate Finance 660-691 (2006), nearly final version at lt;a href=quot;http://ssrn.com/abstract=428662quot;gt;http://ssrn.com/abstract=428662lt;/agt