Woochan Kim

Foreign Portfolio Investors Before and during a Crisis

Using a unique data set, we study the trading behavior of foreign portfolio investors in Korea before and during the currency crisis. Different categories of investors have significant differences as well as similarities. First, non-resident institutional investors are always positive feedback traders, whereas resident investors before the crisis were negative feedback (contrarian) traders but switch to be positive feedback traders during the crisis. Second, individual investors herd significantly more than institutional investors. Non-resident (institutional as well individual) investors herd significantly more than their resident counterparts. Third, differences in the Western and Korean news coverage are correlated with differences in net selling by non-resident investors relative to resident investors.

Executive Compensation, Firm Performance and Chaebols in Korea: Evidence from New Panel Data

Executive Compensation, Firm Performance, and Chaebols in Korea: Evidence from New Panel Data This paper provides the first rigorous econometric estimates on the pay-performance relations for executives of Korean firms with and without Chaebol affiliation. To do so, we have assembled for the first time panel data (that provide information not only on executive compensation and firm performance but also on Chaebol affiliation) for 246 firms that were included in KOSPI200 for at least two consecutive years from 1998 to 2001. Contrary to a popular belief that Korean corporate governance and the structure of Korean executive compensation is considerably different from elsewhere in the West, we find that cash compensation of Korean executives is statistically significantly related to stock market performance and that the magnitude of the sensitivity of pay to stock market performance is comparable to the U.S. and Japan. Perhaps even more importantly, further analysis reveals for the first time that such overall significant executive pay-performance link is driven by nonChaebol firms and that no such link exists for Chaebol firms. The evidence is consistent with the recent literature on the nature of Chaebols in Korea and the current corporate governance reform efforts in Korea that are aimed mostly at Chaebol firms. JEL Classification: M52, M12, G30, G15, J33, O53

Methods for multicountry studies of corporate governance: Evidence from the BRIKT countries

This document is an expanded working paper version of Black, de Carvalho, Khanna, Kim, and Yuroglu, Methods for Multicountry Studies of Corporate Governance: Evidence from the BRIKT Countries (2013), http://ssrn.com/abstract=2219525,which contains details on our governance indices and the five countries we study, and additional results, which were omitted from the main paper for space reasons. A replication dataset, accompanying codebook, and replication statistical code for the article and the expanded working paper are available at http://ssrn.com/abstract=2503520. We discuss empirical challenges in multicountry studies of the effect of firm-level corporate governance on firm value, focusing on emerging markets. We assess the severe data, “construct validity,” and endogeneity issues in these studies, propose methods to respond to those issues, and apply those methods to a study of five major emerging markets -- Brazil, India, Korea, Russia, and Turkey. We develop unique time-series datasets on governance in each country. We address construct validity by building country-specific indices which reflect local norms and institutions. These similar-but-not-identical indices predict higher firm market value in each country and when pooled across countries in firm fixed-effects (FE) and random-effects (RE) regressions. In contrast, a “common index” that uses the same elements in each country, has no predictive power. For the country-specific and pooled indices, FE and RE coefficients on governance are generally lower than in pooled OLS regressions; and coefficients with extensive covariates are generally lower than with limited covariates. These results confirm the value of using FE or RE with extensive covariates to reduce omitted variable bias. Bounds on sensitivity to omitted variable bias suggest that individual country results are often fragile.

What Determines the Ownership Structure of Business Conglomerates?: On the Cash Flow Rights of Korea's Chaebol

We examine a number of firm- and group-level factors that shape the ownership structure of business conglomerates, which can include both public and non-public firms. Using an exclusive set of 1997-2002 data on the intra-group shareholdings of 46 of Koreas largest conglomerates, or chaebols, we show that the contribution of individual firms to group control and profitability are important determinants of ownership structure in Koreas chaebol: the controlling shareholders cash flow rights in a group-affiliated firm increases with the firms contribution to group control and profitability. We also find that the level of disparity between voting and cash flow rights is significantly higher than the levels previously reported in the literature on Korean firms, which makes use of only public firms, indicating that non-public firms play a substantial role in increasing the disparity.

What Makes Group-Affiliated Firms Go Public?

The paper attempts to shed light on how group-affiliated firms make their decision on initial public offerings. In particular, we highlight the importance of group-level factors. From our ex ante analysis, using a sample of chaebol affiliated firms in Korea, we find that firms are more likely to go public (i) if a group-controlling shareholder holds high direct share ownership in the company; (ii) if the firms contribution to group control is low; or (iii) if firms are less likely to benefit from the internal capital market. From our ex post analysis, we find that IPO firms do make heavy capital investments in the IPO year and in the year after.

Corporate Governance Indices and Construct Validity

We conduct an exploratory analysis of how researchers can address the issue of “construct validity”, which poses a major challenge to all studies of the effect of corporate governance on firm performance. Many corporate governance studies rely on aggregate governance “indices” to measure underlying, unobserved governance. But we are not confident that we know how to build these indices – often we are unsure both as to what is “good” governance, and how one can proxy for this vague concept using observable measures. These are construct validity questions.As the basis for analysis, we begin with our prior work, in which we build governance indices in four major emerging markets (Brazil, India, Korea, and Turkey). In that work, we argue that one must build country-specific indices, which use country-specific elements that reflect local norms, local institutions, and local data availability. We show that these similar-but-not-identical indices predict firm market value in each country and when pooled across countries, in firm fixed-effects (FE) regressions with extensive covariates. This approach puts great stress on the construct validity challenge of assessing how well a governance measure matches the underlying concept. We address here what can be said about how well these four country-specific indices, and subindices for aspects of governance such as board structure or disclosure, measure unobserved, underlying actual governance quality.

Managerial Entrenchment of Anti-Takeover Devices: Quasi-Experimental Evidence from Korea

With the removal of statute-based anti-takeover provisions during the aftermath of Asian crisis, a significant number of Korean firms started to introduce charter-based measures. In this paper, we make use of this unique situation where firm-level anti-takeover provisions (ATP) vary over time (making firm fixed effects regression feasible) and its amendment requires a shareholder approval (making event study feasible), when investigating the link between ATP and firm performance. Using a sample during 1999-2009, we find that firms with charter-based anti-takeover provisions are smaller in size, have lower inside and foreign ownerships, and upon adoption, experience lower share prices, the extent of which drops with inside ownership. Consistent with the overinvestment hypothesis in Jensen (1986), we also find that these firms increase capital expenditure. Our finding also shows that ATP adoptions are followed by lower profitability and lower dividend payouts. Firms with ATPs also experience greater de-listings after the global financial crisis

Which Aspects of Corporate Governance Matter in Emerging Markets: Evidence from Brazil, India, Korea, and Turkey

There is evidence that a broad measure of corporate governance predicts higher firm values in emerging markets, but little evidence on which specific aspects of governance drive that overall relationship. We study that question by asking which aspects of corporate governance consistently predict firm market value across four major emerging markets (Brazil, India, Korea, and Turkey), using a unique dataset that lets us build country-specific indices in each country for disclosure, board structure, ownership structure, shareholder rights, board procedure, and control of related party transactions. We find that disclosure predicts higher market value in each country (within disclosure, the principal predictor is financial disclosure); board structure has a positive coefficient in all countries and is significant in Brazil and Korea (within board structure, the principal predictor is board independence); and that once one controls for disclosure and board structure, the other indices do not predict firm value. These results suggest that firms, in responding to investor demands for better governance; and investors, in assessing governance quality, can do reasonably well in focusing on disclosure and board structure. The differences between results without firm effects (pooled OLS) and with firm effects (random or fixed effects) support the need to use panel data and firm effects in corporate governance research.

Do Business Groups Harm Capital Allocation Efficiency Outside the Business Group

This study investigates whether business groups can harm the capital allocation efficiency of non-business group firms. From a sample of Korean firms (1987 to 2010), we compute an annual index of the collective strength and dominance of large business groups (LBG) per industry. We find that this index is negatively associated with the industry-level capital allocation efficiency of non-LBG firms during a period characterized by underdeveloped financial markets and weak investor protection. The association is stronger in industries that may lack collateral or internal equity capital. Results are robust to different measures of the index and investment opportunity.

Executive Compensation When a Firm is a Business Group Member

This paper examines how executive pay is set when a firm is a business group member. Using Korea as a laboratory setting, we find that member firm’s cash compensation for its executives is positively linked to the stock performance of other member firms as well as its own. Further analyses reveal that this positive link to other members’ performance is consistent with the hypothesis of corporate resources being tunneled from one member to another for the benefit of the controlling family. We find that this link is stronger to the performance of others that are more likely to benefit from tunneling (firms in which the controlling family has cash flow rights greater than those of the subject firm) and in firms that are more likely to suffer from tunneling (firms in which the controlling family has control-ownership disparity above the sample median).