CORPORATE GOVERNANCE IN FINANCIAL CRISIS

Can good corporate governance help companies through financial crisis?

Abstract

This study examines how corporate governance structure and conflicts of interest among shareholders under the poor corporate governance system affected firm performance before crisis. Using 50 firms subject to outside auditing, paper finds that firms with low corporate governance concentration show low firm profitability, controlling for firm and industry characteristics. Controlling shareholders expropriated firm resources even when their corporate governance concentration was small. Firms with the high disparity between control rights and corporate governance rights showed low profitability. When the business group transferred resources from the subsidiary to another, they were often wasted, suggesting that “tunneling” occurred. In addition, negative effects of control-corporate governance disparity and internal capital market inefficiency were stronger in publicly traded firms than in privately held ones.

Table of Content

ABSTRACTII

ACKNOWLEDGEMENTIV

CHAPTER 01: INTRODUCTION1

Outline of Research1

Aims and Objectives1

Theoretical Framework2

Purpose of Research2

Limitations3

CHAPTER 02: LITERATURE REVIEW4

The crisis and corporate sector problems4

Corporate governance structure of firms5

Determinants of firm profitability8

Control-corporate governance disparity9

Firm organization10

Financial structure10

CHAPTER 03: METHODOLOGY11

Research Design11

Measures13

Data13

Variables14

CHAPTER 04: RESULTS ANALYSIS19

Empirical tests and results19

Impact of controlling shareholders' corporate governance on firm profitability21

Yearly regression results23

Determinants of firm profitability25

Robustness tests26

Time-varying effects of corporate governance concentration27

Nonlinearity of corporate governance effects29

Expropriation in publicly traded firms31

CHAPTER 05: SUMMARY AND DISCUSSION OF RESULTS36

CHAPTER 06: CONCLUSION AND RECOMMENDATION38

REFERENCES40

APPENDIX45

Appendix A. List of Top 30 business groups (chaebols)45

Acknowledgement

I would like to express my thanks to my advisor, for his suggestions, comments, patience and understanding. Very special thanks to my parents, my father, my mother, my brother and my sister who were continuously supporting me throughout my life and leaving me free in all my decisions. I would also like to thank my colleagues for his technical support whenever I needed. I would like to thank to Department, all the university managers, teachers and students with whom I have worked.

I certify that the work presented in the dissertation is my own unless referenced

Signature..........................................

Date.....................................

CHAPTER 01: INTRODUCTION

Outline of Research

Many countries that suffered during recent economic crises in Asia and other emerging markets had weak legal environments and poor governance systems. This observation has triggered much discussion on importance of corporate governance. For example, Aghion, P., Bacchetta, P. and Banerjee, A., (2009) show that countries with weak legal protections suffered greater exchange rate depreciation and severer stock market declines during crisis. Using firm level data, De Bondt, W.F.M, Richard, F.M. and Thaler, R.H., (2009) shows that corporate governance measures, such as high disclosure quality and concentrate corporate governance, affected stock market valuation during crisis. De Bondt, Richard, (2009) show that, during crisis, firms showed low performance when their controlling managers had more control rights than corporate governance rights.

Aims and Objectives

There are four objectives of this research as below.

Most prior research focus on the effects of corporate governance structure during the finanacial crisis.

This study examines its effects before the crisis. argue that the financial distress of firms helped cause the crisis. If poor corporate governance helped lower firm value and financial survivability before the crisis, it arguably increased the economy's aggregate ...