Two essays of empirical studies on Korean corporate governance

Abstract

Since the 1997 economic crisis, Korea's corporate governance system has been reformed through several amendments of Commercial Law. Improving corporate governance increases firm value by promoting a transparent and reliable corporate environment and protects shareholder rights. In this study, I analyze the role of Korean corporate governance in two aspects. First, I investigate which structure, board or audit committee, effectively plays monitoring roles in Korea. I analyze the effects on firm values against the expropriation incentives during the global financial crisis. I find that Korean boards transferred monitoring roles to audit committees, which significantly reduce the expropriation. The audit committee’s monitoring function is effective only when all the members are outside directors. The evidences offer valuable insights for investors seeking enforcement of independent audit committee to increase their wealth. Second, I examine executive compensation structures with a focus on family business groups, called chaebols, in Korea. The results show that chaebol firms provide 60% more total compensation to CEOs who are family members than to professional CEOs. This excessive increment is not based on performance-contingent payments, but on fixed payments. The propensity score matching and difference-in-differences analyses robustly support these results. Further, I find that operation of internal capital markets, CEO talents, CEO stock ownership, and family board membership do not explain the excessive compensation of family CEOs in family business groups. The evidence indicates rent extraction through executive compensation in family business groups.