Ownership Structure, Intensive Board Monitoring, and Firm Value: Evidence from Korea*

Ownership Structure, Intensive BoardMonitoring, and Firm Value: Evidencefrom Korea*

Hee Sub ByunAsian Institute of Corporate Governance, Korea University

Ji Hye Lee**Korea University Business School

Kyung Suh ParkKorea University Business School

Received 31 August 2012; Accepted 27 December 2012

Abstract

This article measures proxies for intensive board monitoring using Korean corporate

governance data. We find that intensive board monitoring has a positive effect on firm value in

Korea. We also explore the relationship between controlling shareholders’ ownership and inten-

sive board monitoring efficiency. We confirm that direct ownership by controlling shareholders

moderates the relationship between intensive board monitoring and firm value. For firms with

greater disparity between controlling shareholders’ control rights and cash flow rights, the effect

of intensive board monitoring on firm value decreases. These results suggest that the interplay

among various internal control mechanisms affects corporate governance efficiency.

Keywords Monitoring committee; Outside directors; Firm value; Controlling shareholders;

Emerging markets

JEL Classification: G30, G32, G34

1. Introduction

In corporate governance, the monitoring role of boards of directors is a critical

component of internal control (Jensen, 1986). Most research in this area has

focused on the role of outside directors and has commonly used the composition

ratio of outside directors on the board as a proxy for the efficiency of board

monitoring. Moreover, this research has demonstrated that for firms with a high

*Acknowledgement: This paper is supported by a Korea University Grant.

**Corresponding author: Ji Hye Lee, Korea University Business School, 145 Anam-ro, Seong-

buk-gu, Seoul 136-701, Korea. Tel: +82-2-32901950, Fax: +82-2-32902552, email: leejihye@

korea.ac.kr.

Asia-Pacific Journal of Financial Studies (2013) 42, 191–227 doi:10.1111/ajfs.12012

© 2013 Korean Securities Association 191

proportion of outside directors on the board, managers’ agency problems decrease

significantly and managerial decision-making processes are used to maximize share-

holder wealth (Fama, 1980; Fama and Jensen, 1983). However, because boards of

directors not only monitor managers, but also provide strategic advice to increase

profitability and sustain the growth of a firm (Mace, 1971), the composition ratio

of outside directors may be an ambiguous measure of the monitoring effect of the

board of directors. By using board composition as a proxy, it is difficult to con-

clude which role of the board (monitoring, advisory, or both) has an effect on firm

value. Therefore, recent literature uses a more sophisticated proxy, intensive board

monitoring, to represent the role of outside directors. In doing so, this research has

chiefly focused on the monitoring committee, and has analyzed its effect on share-

holder value (Adams and Ferreira, 2007; Faleye et al., 2011).

There are competing theories on the effect of intensive board monitoring on

firm value. Mace (1971) argued that as the internal control mechanism for the

agency problem, outside directors efficiently replace incompetent managers during

crises. However, this study was unable to identify clear associations between the

strategic advising role of the outside directors and firm value. More recent studies,

however, have concluded differently. Holmstron (2005), for example, proposed that

intensive board monitoring destroys the trust necessary for CEOs to share relevant

strategic information with directors. Using data from the U.S. firms, Faleye et al.

(2011) empirically demonstrated that, although firms with monitoring committees

characterized by a majority of outside directors efficiently discipline agency prob-

lems, the restrictions on the role of strategic advising reduce overall firm value. Spe-

cifically, the cost of intensive board monitoring exceeds the benefit of strategic

advice from outside directors. However, these results may not be applicable to

emerging economies with less-developed capital markets and weak external control

mechanisms. The effect of the monitoring or advisory role of outside directors on

firm value is determined by the net effect of benefits minus costs (Linck et al.,

2008).1 This net effect is influenced by environmental factors, such as the efficiency

of market mechanisms and related laws. We believe that intensive board monitoring

may have different effects on firm value in emerging economies relative to devel-

oped economies.

By focusing on outside directors of monitoring committees, this article intro-

duces diverse proxies for measuring the monitoring intensiveness of boards of

directors using Korean data. In emerging markets, external control mechanisms

(e.g. market for corporate control and the managerial labor market) are not well

1This article borrows the logic of previous studies that the intensive monitoring of outside

directors decreases the amount of corporate information shared with outside directors, and

thus reduces their advisory function (Holmstron, 2005; Adams and Ferreira, 2007). In this

regard, we can say that we are focusing more closely on the monitoring role of outside direc-

tors, rather than on their advisory role, and investigate the interaction of the monitoring role

with the economic incentives of controlling shareholders in the latter part of this article.

H. S. Byun et al.

192 © 2013 Korean Securities Association

implemented due to less-developed capital markets and regulatory weakness (La

Porta et al., 2000). Furthermore, one of the common features of emerging markets

is the existence of controlling shareholders in most firms due to concentrated own-

ership structures. Since shareholders with excessive control rights are relatively free

from market for corporate control and managerial labor markets, they have a strong

incentive to pursue the private benefit of control (Claessens et al., 2002). Therefore,

unlike in developed countries, monitoring managers in emerging markets depends

primarily on internal control mechanisms, such as the board of directors and own-

ership structure.2 After the recent financial and economic crisis, the importance of

internal corporate governance has been emphasized in emerging markets. Given

this, this article confirms that the net effect of intensive board monitoring can be

altered by external environment characteristics.3

This study also offers more sophisticated measures of monitoring committee

intensiveness. Monitoring committees are the most fundamental device to control

agency problems, but empirical studies geared towards analyzing monitoring com-

mittees and agency problems are rare (Adams et al., 2010). Among those studies

that do exist, Shivdasani and Yermack (1999) showed that firms that (i) have CEOs

on the nomination committee; or (ii) completely lack a nomination committee,

have a smaller number of outside directors, and experience lower stock returns.

Klein (1998) demonstrated that the number of outside directors on financing and

investment committees is positively associated with profitability.

More importantly, this study investigates whether the effect of intensive board

monitoring on firm value can be moderated by the ownership structure of control-

ling shareholders. The monitoring effect of the board can be influenced by the

interests of various stakeholders related to management (Lipton and Lorsch, 1992).

In this regard, previous literature has argued that ownership structure has a signifi-

cant effect on the efficiency of board monitoring (Denis et al., 1997). In emerging

markets, most firms have controlling shareholders who have considerable leverage

over management. Thus, the effect of intensive board monitoring on firm value

2In this regard, Williamson (1983) emphasizes that monitoring of the board of directors can

be substituted for external control mechanisms, such as market for corporate control and

managerial labor market.3Furthermore, Choi et al. (2007) examined the role of outside directors in Korea, which insti-

tuted legislation related to the ratio of outside directors on firms’ boards of directors follow-

ing the Asian economic crisis. They found that outside directors have a significant and

positive effect on firm performance and argued that this differs from studies that used the

U.S. firms as data. They also showed that family ownership interferes with board indepen-

dence and damages Korean firm performance. However, Choi et al. (2007) did not focus on

boards of directors’ monitoring committees to distinguish between the monitoring role and

advisory role of outside directors. In this way, they did not consider the effect of intensive

board monitoring on shareholder value. Moreover, they did not examine the effect of dispar-

ity in the ownership of controlling shareholders that reflects their incentive for pursuing the

private benefit of control.

Intensive Board Monitoring


may depend on the ownership structure of controlling shareholders. As a proxy for

financial incentive, we use cash flow rights and the disparity between control rights

and cash flow rights. According to Jensen and Meckling (1976), firm value is higher

for firms with high management ownership because of mitigated conflicts of inter-

est between managers and shareholders. Similarly, controlling shareholders with

high levels of direct ownership would actively discipline managers to maximize their

own cash flow rights. In this case, controlling shareholders would stimulate the

board of directors to monitor more efficiently. In other words, the monitoring

function of the controlling shareholders would complement intensive board moni-

toring (Shleifer and Vishny, 1997).4 In contrast, for firms in which controlling

shareholders have high levels of ownership, agency problems are less likely. As a

result, these firms are likely to decrease the monitoring function of their boards of

directors. Thus, responsibilities for monitoring the board are replaced by the own-

ership. We also propose that because the controlling shareholders are managers

themselves, they may not prefer committee-based monitoring and would therefore

reduce the monitoring role of the committees.

In contrast, controlling shareholders can maintain considerable control rights by

engaging in indirect ownership. Controlling shareholders with high disparity (i.e.

have high control rights that are in excess of cash flow rights) have a strong incen-

tive to maximize their control (Grossman and Hart, 1988). Related to this, Joh

(2003) showed that the main cause of the Korean financial crisis was the agency

problem that arose from the pursuance of control that resulted from high levels of

disparity (Lemmon and Lins, 2003). By controlling shareholders with high disparity,

there is a strong incentive to weaken the efficiency of intensive board monitoring to

produce a favorable environment for pursuing the private benefit of control. In

addition, when controlling shareholders have a strong incentive to cause an agency

problem, board monitoring can be more actively implemented. In this case, the

marginal effect of board monitoring on shareholder value should increase with the

disparity.5

In emerging markets, monitoring the agency problem depends primarily on an

internal control mechanism owing to the inefficiency of available external control

mechanisms. If intensive board monitoring is influenced by the ownership structure

of controlling shareholders, it implies that firm characteristics can affect the

efficiency of internal control. In this respect, this article is consistent with previous

literature, which has shown that effective corporate governance depends on not only

one specific mechanism but also various interactions among control devices (Gillan

et al., 2003). Because there are limits to the degree that managers can be disciplined

4In this argument, we assume that controlling shareholders can affect the decision-making

processes of the board of directors (Kim and Kim, 2008).5Since controlling shareholders can actively engage in the formation and operation of board

monitoring based on their ownership, the board of directors may find it difficult to discipline

them in reality (Kim and Kim, 2008).

H. S. Byun et al.


through market mechanisms, effective internal corporate governance is critical

(Shleifer and Vishny, 1997). Similarly, Hermalin and Weisbach (1998) have shown

that board structure can be altered by the bargaining power of managers or corpo-

rate insiders.

The Korean market was chosen as the focal point of this study because it is a

typical emerging economy with inefficient external control mechanisms and the net

effect of intensive board monitoring differs from that of developed countries (Bae

et al., 2002). In Korea, disparity between controlling shareholders’ control rights

and cash flow rights is commonly observed due to the concentrated ownership

structure. Therefore, the Korean market offers a relatively large sample for testing

the interaction between ownership structure of controlling shareholders and inten-

sive board monitoring (Baek et al., 2004). Additionally, compared to previous liter-

ature, more detailed information on monitoring committees is available for Korean

firms.

The main contribution of this article is its development of sophisticated mea-

sures for board monitoring intensiveness. To this end, this study introduces two

proxies for intensive board monitoring: the average proportion of outside directors

in each monitoring committee and whether the chairman of the monitoring com-

mittee is an outside director. Moreover, we show how the results of previous stud-

ies that have examined developed countries may differ from the results gleaned

from examining an emerging economy (Korea) with less-developed capital markets

and inefficient external control mechanisms. We expect that the net effect of inten-

sive board monitoring will differ from that of developed countries such that it

would have a positive effect on firm value in Korea, in contrast to the negative

effect seen in the United States. In addition, because many firms in emerging mar-

kets have concentrated ownership structures, we show that the controlling share-

holders’ incentives, as measured by their direct ownership and the disparity

between their control rights and cash flow rights, can affect the efficiency of inten-

sive board monitoring.

To explore these questions, this study uses 667 Korean-exchange listed firms

from 2005 to 2009. The selection of the sample is subject to availability of the infor-

mation on the monitoring committees and ownership structure of controlling

shareholders. First, to confirm the effect of intensive board monitoring on firm

value, this study features regressions of Tobin Q on the four proxies for intensive

board monitoring. In addition, an important issue in the relationship between

board structure and firm value is endogeneity (Weisbach, 1988). Although there is

an effect of board structures on firm value, there is also an effect of firm value on

board structures. Highly valued firms have a greater capacity for paying monitoring

costs and a stronger incentive to signal their own value by utilizing effective board

structures, compared to other firms. To address the endogeneity problem, we (i)

include both the industry and year-fixed effects in our empirical models, (ii) use a

lagged independent variable model, (iii) estimate robust standard errors incorporat-

ing firm level clustering, and (iv) examine the robustness of our results by including



the lagged values of the dependent variable in the models. More importantly, using

a dummy-coded variable that takes a value of 1 if the firm’s asset size is more than

2 trillion won (and 0 otherwise) to measure the board monitoring intensiveness, we

also (v) estimate a simultaneous equations framework (Black et al., 2009).

Next, to examine the efficiency of intensive board monitoring vis-�a-vis the own-

ership structure of controlling shareholders, this study investigates the effect of the

interaction between four proxies for intensive board monitoring and the ownership

structure on firm value. In light of the high correlation between the four proxies

for intensive board monitoring and ownership structures, this study divides the

sample into two sub-samples on the basis of the ownership structure and estimates

the effect of intensive board monitoring on firm value in each sub-sample. To do

this, we verify a statistically significant difference in the four proxies for intensive

board monitoring between the samples. Further, shareholders in a chaebol conglom-

erate in Korea can have considerable leverage over the entire business group by

asserting their control rights through a complex pyramid ownership structure and

cross-holdings among the affiliate firms. Within chaebols, extreme disparity between

control rights and cash flow rights is identified as a strong incentive for controlling

shareholders to pursue the private benefit of control (Baek et al., 2004). Therefore,

we use a dummy-coded variable to indicate whether firms belong to a chaebol con-

glomerate as another proxy for the disparity. This study additionally analyzes the

interaction between intensive board monitoring and the chaebol dummy-coded

indicator variable on firm value.

The main results of this study are as follows: intensive board monitoring has a

significantly positive effect on firm value. These results are contrary to those

reported in extant research that has used data from developed countries. We

interpret this to mean that in Korea, where external corporate governance is rela-

tively inefficient, the benefit of intensive board monitoring outweighs the costs

associated with it. Following the use of various statistical methods to mitigate the

endogeneity issue, we find similar results. In the analysis using a sample of firms

with outside directors in the monitoring committees, both (i) the composition

ratio of outside directors in the monitoring committee and (ii) whether an out-

side director is in charge of the chairman have a significantly positive effect on

firm value.

In an analysis that confirms the interaction effect between intensive board

monitoring and ownership structure on firm value, the marginal effect of intensive

board monitoring on firm value increases significantly as controlling shareholders

have higher cash flow rights. In contrast, when controlling shareholders have con-

trol rights in excess of cash flow rights, the marginal effect of intensive board

monitoring on firm value significantly decreases. Similar results are observed when

we use a dummy-coded variable as a proxy for higher disparity. In sum, control-

ling shareholders’ incentives can affect the efficiency of intensive board monitoring

in Korea.

H. S. Byun et al.


The rest of this article is organized as follows. Section 2 discusses related litera-

ture and presents our hypotheses. Section 3 describes the data and the construction

of variables of interest. Section 4 reports the empirical results, and Section 5 pre-

sents our conclusions.

2. Hypotheses Development

Previous literature that has analyzed firms in developed countries has argued that

the cost of intensive board monitoring (i.e. the weakening of the strategic advising

role) outweighs the benefits associated with it. Thus, intensive board monitoring

has been shown to have an overall negative effect on firm value (Holmstron, 2005;

Faleye et al., 2011). This suggests that intensive board monitoring is not an essential

factor for maximizing shareholder wealth. However, the extent to which these con-

clusions are applicable to emerging markets remains unclear. There are three rea-

sons for such doubt. First, external control mechanisms, such as the market for

corporate control and the managerial labor market, are inefficiently operated in

emerging markets. In developed countries, such as the United States and the United

Kingdom, corporate decisions related to raising capital or managerial discipline are

influenced chiefly by market mechanisms. This is not the case in emerging markets

(Khanna and Rivkin, 2001). Moreover, market mechanisms are wrongfully used as

tunneling devices for pursuing the private benefit of control (Bae et al., 2002).

Therefore, discipline for the agency problem typically depends on internal control

mechanisms, such as ownership structure and the board of directors. We extend

this argument by positing that the cost and benefit of intensive board monitoring

in developing countries can likewise differ from those of developed countries.6

Second, the legal systems are different in developing countries relative to devel-

oped countries. La Porta et al. (1998) showed that if the agency problem of control-

ling shareholders and managers becomes an obstacle to the operation of a capital

market system, a strong legal system helps to protect shareholder rights. In this

regard, common law countries, such as the United States and United Kingdom,

protect investors’ rights and, as a result, have effective corporate governance. How-

ever, civil law countries, such as Korea and Japan, do not protect investors satisfac-

torily. Therefore, in countries with weak investor protections, the monitoring role

of boards of directors is emphasized more than in countries with effective infra-

structural investor protection.

The final reason to doubt that past findings would be applicable to developing

nations is the existence of controlling shareholders. In an emerging market with

concentrated ownership structures, controlling shareholders hamper the efficient

operation of the market for corporate control (La Porta et al., 2000). Furthermore,

because controlling shareholders are deeply involved in the appointment of CEOs,

6In reality, policy authorities in Korea adopt regulations related to internal corporate gover-

nance, mainly about the board of directors (Black and Kim, 2011).



the managerial labor market is not operated properly. Therefore, minority share-

holders expect strong monitoring from the board of directors to regulate controlling

shareholders and managers. In sum, in an emerging market with inefficient market

mechanisms, the board of directors is mainly expected to work as a strong monitor-

ing device rather than a strategic advising device. In this way, the benefit of inten-

sive board monitoring exceeds the cost in developing countries. Therefore, intensive

board monitoring may have a significantly positive effect on firm value in Korea,

which is contrary to what would be expected in a developed country like the United

States.

Hypothesis 1. Intensive board monitoring has a positive effect on firm value.

In an emerging market with concentrated ownership structures, controlling

shareholders have considerable power over management. Generally, there are two

ways in which controlling shareholders secure influence on corporate decision-mak-

ing processes. First, they exercise voting rights through direct ownership. Since man-

agers who own a significant portion of the firm have a strong incentive to maximize

the value of cash flow rights, conflicts of interest between managers and shareholders

is mitigated (Jensen and Meckling, 1976). In this context, when shareholders possess

de facto control that transcends that of managers with direct ownership, the agency

problem is mitigated and shareholder wealth increases (Grossman and Hart, 1988).

Because controlling shareholders have a strong incentive to maximize the value of

their own cash flow rights by monitoring management, the marginal effect of inten-

sive board monitoring increases in parallel with the direct ownership of controlling

shareholders. This perspective is consistent with the perspective that controlling

shareholders can affect the structure of the board of directors. Controlling sharehold-

ers reinforce the monitoring role of the board of directors to more actively control

the behaviors of management personnel. In this way, the incentive for controlling

shareholders to monitor management would complement the monitoring function of

the board of directors (Shleifer and Vishny, 1997). In contrast, when controlling

shareholders have a higher degree of direct ownership, they are no less likely to create

an agency problem. In this case, the effect of a board of directors’ monitoring func-

tions on firm value is reduced. In other words, intensive board monitoring is sup-

planted by the ownership of controlling shareholders.

Hypothesis 2. The marginal effect of intensive board monitoring on firm value can

be affected by direct ownership of controlling shareholders.

On the other hand, controlling shareholders with little direct ownership indi-

rectly exercise their control power for management by using the pyramid ownership

structure and cross-holdings among affiliate firms (Johnson et al., 2000). The pri-

vate benefit enjoyed by controlling shareholders is proportional to firm size, because

the shareholders can have more discretion using corporate resources and would

seek to signal their reputation in the capital market (Jensen, 1986). Thus, they have

a strong incentive to over-invest to expand their control. In this regard, controlling

H. S. Byun et al.


shareholders with a high disparity between cash flow rights and control rights bene-

fit less from the increase in the value of direct ownership, but prefer to enjoy the

private benefit of control using extensive control rights. Under similar conditions,

controlling shareholders undermine the efficiency of intensive board monitoring to

expand their own discretion, which is proportional to the private benefit of control.

This conjecture assumes that controlling shareholders have significant influence on

the decision-making process and the structure of the board of directors.7 When

controlling shareholders with high disparity have strong incentive to engender

agency problems, board monitoring should be operated more actively. However,

since controlling shareholders have a stronger control power than does the board of

directors in Korea, it is difficult for the board of directors to actually discipline

them.


be affected by the disparity between cash flow rights and control rights of control-

ling shareholders.

To evaluate the robustness of hypothesis 3, we use a firm’s membership (or lack

of membership) to a chaebol conglomerate as a proxy for controlling shareholders’

incentive to pursue their private benefit of control. Past research has shown that con-

trolling shareholders in a chaebol group tend to have considerable control rights that

exceed cash flow rights. Moreover, their position in the chaebol group allows them to

exercise de facto power over a number of firms in the group. As a result, they have a

strong incentive to maximize private control (Johnson et al., 2000). Because there are

a number of ways in which controlling shareholders can pursue the private benefit of

control through affiliate firms, the aforementioned agency problem is prone to recur-

ring. Therefore, the relationship between the incentive of controlling shareholders to

pursue the private benefit and intensive board monitoring efficiency would be more

pronounced for a sample that includes chaebol-based firms.


be changed by the fact as to whether firms belong to the chaebol conglomerate or

not.

3. Data and Variables

3.1. Data

In constructing our sample, we used the Korean Stock Exchange (KSE) as an initial

list from which to draw firms for analysis. All financial and insurance companies

were excluded, as were firms with impaired capital. Among those that remained,

7However, the result such that the interaction effect between intensive board monitoring and

disparity of controlling shareholders on firm value is negative is not interpreted as a substitu-

tion effect, similar to hypothesis 2, because the disparity of controlling shareholders is not

considered a control mechanism for the agency problem.



firms for which information regarding the monitoring committee on the board,

corporate provision, ownership of controlling shareholders, financial and account-

ing information, and stock returns were selected for inclusion in the analysis sam-

ple. Finally, we restricted the sample period to include only the years between 2005

and 2009. These exclusion and inclusion criteria produced a list of 667 companies

(2968 firm-year sample). Financial and accounting data were obtained from the

TS-2000 database developed by the Korea Listed Company Association (KLCA).

The data regarding business groups (chaebol) were taken from the Korean Fair

Trade Commission (KFTC). The KFTC was founded in 1981 to monitor conglom-

erate activities in the Korean economy as a means to establish a fair trade policy

and monitor unfair transactions. The KFTC annually reports information related to

conglomerates–most importantly, the conglomerate’s size and degree to which a

controlling family can exert power over member firms. Daily stock returns were

retrieved from Fn-Guide, a Korean financial data provider.

Information related to monitoring committees and ownership of controlling

shareholders was provided by Korean Corporate Governance Services (KCGS), a

non-profit organization that has compiled corporate governance information for all

Korean companies on the KSE annually. The KCGS provides firm-level corporate

governance information with an associated score. In 2006, they used 130 items

(maximum score = 300) to assess firms.8 The KCGS corporate governance index

consists of five sub-indices: shareholder rights, the board of directors, corporate dis-

closure, audit scheme, and dividend policy. The corporate governance index is pro-

duced by a quasi-government organization and can thus be assumed to be objective

and accurate. KCGS discloses only the average index of the assessed firms and the list

of the best evaluated firms. Furthermore, the score and details concerning how the

score was achieved are not publicly revealed. This study acquires the internal data-

base of KCGS for detailed evaluation contents. Based on these, we create the proxies

for intensive board monitoring and ownership structure of controlling shareholders.

3.2. Variables

3.2.1. Intensive Board Monitoring Index

To measure intensive board monitoring, we create four proxies based on available

information about the board’s monitoring committee. More specifically, we treat

the audit committee, outside director nomination committee, and compensation

committee as the monitoring committees on the board, which is consistent with

Black and Kim (2011) and Faleye et al. (2011).9 Following Faleye et al. (2011), the

first measure of the intensive board monitoring index (IBMI 1) is determined by

8For detailed information about the corporate governance index of KCGS, refer to Byun et al.

(2012).9In the United States, the New York Stock Exchange (NYSE) considers these to be monitor-

ing committees and requires the appointment of outside directors on them (Faleye et al.,

2011).

H. S. Byun et al.


calculating the mean proportion of outside directors belonging to each monitoring

committee relative to total outside directors. If a large number of outside directors

belong to the monitoring committee, it is assumed that the committee would be

more focused on monitoring than providing strategic advice. As a second proxy

(IBMI 2), we calculate the average composition ratio of outside directors in each

monitoring committee. Outside directors who wish to indicate their reputation in

the capital market have a stronger incentive to discipline managers than do inside

directors. In contrast, inside directors have little incentive to monitor managers

since an inside director’s appointment is largely contingent on the CEO’s decision

(Fama, 1980; Weisbach, 1988). If the majority of inside directors belong to the

monitoring committee, the monitoring function is weakened. Therefore, disciplin-

ing managers is effective when there are more outside directors on the monitoring

committee than inside directors. As a third proxy, we determine whether the chair-

man of a monitoring committee is an outside director or not. Brickley et al. (1997)

argued that if a CEO is not the chairman of the board for the firm he/she leads, the

board of directors tends to operate more efficiently in terms of shareholder value

maximization. Despite the presence of a monitoring committee with a high propor-

tion of outside directors, intensive board monitoring is weakened if an inside direc-

tor is appointed as chairman. In contrast, the board becomes more effective at

monitoring when an outside director is in charge of the chairman in the monitor-

ing committee. Therefore, we sum the number of monitoring committees in which

an outside director is in charge of the chairman (IBMI 3). Since many Korean firms

do not have monitoring committees, whether a firm establishes a monitoring com-

mittee at all can be used as a proxy for intensive board monitoring. Thus, similar

to Black and Kim (2011), we also use the overall number of monitoring committees

as a proxy variable.

Table 1 presents the descriptive statistics associated with the monitoring com-

mittees mentioned above. Panel A reports the distribution ratio of firms with out-

side directors in the monitoring committee by year. Firms that either (i) completely

lack a monitoring committee or (ii) neglect to include an outside director on the

monitoring committee have a value of 0. The average ratio of firms with outside

directors in the monitoring committee is 21.77% between 2005 and 2009. This fig-

ure suggests that Korean firms where outside directors are primarily in charge of

monitoring are just 20% of all firms sampled. More specifically, the average ratio of

firms with outside directors on the auditing committee is 20.49%. This is compara-

tively higher than the average ratios of firms with outside directors on nomination

committees (13.65%) and compensation committees (2.90%). Panel B shows the

average proportion of outside directors belonging to the monitoring committee.

Between 2005 and 2009, the average percentage of outside directors on the moni-

toring committee increases across all years, and the average ratio is 8.48%. This sug-

gests that a large number of firms do not have monitoring committees. The average

proportion of outside directors belonging to auditing committees, outside director

nomination committees, and compensation committees is 16.66, 7.23, and 1.82%,



Table 1 Descriptive statistics of monitoring committee in Korea

This table shows the descriptive statistics for monitoring committees (audit, outside director nomination,

and compensation) in Korea. Panel A shows the yearly average of the percentage of firms with outside

directors in monitoring committees. Panel B shows the yearly average of the percentage of outside direc-

tors in monitoring committees out of total outside directors. Panel C shows the yearly average of the

composition ratio of outside directors in monitoring committees. Panel D shows the yearly average of

the percentage of firms with an outside director being in charge of the chairman in monitoring commit-

tees. The numbers in parenthesis are from the sample of firms with outside directors in monitoring com-

mittee.

Panel A: Average percentage of firms with outside directors in monitoring committees (%)

Year Total

Audit

committee

Outside director

nominate committee

Compensation

committee

2005 17.83 16.81 11.21 2.55

2006 19.09 17.74 12.16 2.70

2007 21.30 19.47 14.64 3.00

2008 25.04 23.89 15.32 3.29

2009 25.56 24.53 14.85 2.94

Total 21.77 20.49 13.65 2.90

Panel B: Average percentage of outside directors in monitoring committees out of total out-

side directors (%)

Mean Audit committee

Outside director

nominate committee

Compensation

committee

2005 6.81 (38.22) 13.73 (75.59) 5.64 (31.06) 1.46 (8.03)

2006 7.31 (38.29 14.39 (74.11) 6.31 (32.51) 1.60 (8.24)

2007 8.46 (39.74) 15.79 (73.39) 7.88 (36.62) 1.98 (9.21)

2008 9.94 (39.70) 19.54 (77.79) 8.21 (32.69) 2.16 (8.62)

2009 9.84 (38.48) 19.78 (76.85) 8.05 (31.28) 1.88 (7.31)

Total 8.48 (38.94) 16.66 (75.70) 7.23 (32.85) 1.82 (8.27)

Panel C: Average percentage of outside directors out of total directors in monitoring com-

mittees (%)

Mean Audit committee

Outside director

nominate committee

Compensation

committee

2005 8.22 (46.11) 15.81 (88.70) 6.89 (38.63) 1.96 (11.00)

2006 8.77 (45.95) 16.61 (87.04) 7.58 (39.71) 2.12 (11.11)

2007 9.95 (46.72) 18.48 (86.78) 9.15 (42.95) 2.22 (10.44)

2008 11.61 (46.36) 22.72 (90.73) 9.65 (38.52) 2.46 (9.81)

2009 11.72 (45.85) 22.96 (89.84) 9.78 (38.25) 2.42 (9.45)

Total 10.06 (46.20) 19.32 (88.77) 8.61 (39.56) 2.24 (10.27)

H. S. Byun et al.


respectively. Panel C presents the average composition ratio of outside directors in

each monitoring committee. The average composition ratio is 10.06% in total,

19.32% in the audit committee, 8.61% in the outside director nominate committee,

and 2.24% in the compensation committee. Panel D shows the average number of

firms in which an outside director is appointed as the chairman of the monitoring

committee. An outside director acted as chairman of the monitoring committee in

19.31% of the sample. Given that 21.77% of firms install a monitoring committee

(as reported in Panel A), it follows that most outside directors serve as chairman of

the monitoring committee. The ratio of firms where outside directors are appointed

as a chairman of the audit committee, outside director nomination committee, and

compensation committee is 18.83, 4.38, and 2.09%, respectively.

The numbers in parentheses in Table 1 are the average ratios of firms with out-

side directors in the monitoring committee. The sample of firms with outside direc-

tors on the monitoring committee is almost the same as the sample of firms with

monitoring committees, because most firms with monitoring committees (660 firm-

year samples) appoint at least one outside director as a member of the monitoring

committee (646 firm-year samples). The numbers in parentheses are higher than

those reported for the total sample. This indicates that the proxies for intensive board

monitoring in this study are closely related to the installation of the monitoring com-

mittee itself. Specifically, the low average ratio of outside directors belonging to the

monitoring committee and the average composition ratio of outside directors in

monitoring committees are driven by firms without a monitoring committee.

Among firms with a monitoring committee, the average ratio of outside

directors belonging to a monitoring committee (38.94%) and the average composi-

tion ratio of outside directors in a monitoring committee (46.20%) are relatively

high. In instances in which a firm has a monitoring committee, the chairman of

said committee is most often an outside director (88.54%). While most United

States firms install the monitoring committee on the board, Korean firms do not.

Thus, investors may judge a firm to be highly valued when it installs a monitoring

Table 1 (Continued)

Panel D: Average percentage of firms with an outside director being in charge of the chair-

man in monitoring committees (%)

Total Audit committee

Outside director

nominate committee

Compensation

committee

2005 16.30 (91.43) 15.96 (89.52) 3.57 (20.00) 1.87 (10.48)

2006 16.89 (88.50) 16.39 (85.84) 3.89 (20.35) 2.20 (11.50)

2007 18.80 (88.28) 17.80 (83.59) 4.99 (23.44) 2.33 (10.94)

2008 22.41 (89.47) 22.24 (88.82) 4.45 (17.76) 1.98 (7.89)

2009 22.11 (85.81) 21.76 (84.46) 5.01 (19.59) 2.07 (8.11)

Total 19.31 (88.54) 18.83 (86.38) 4.38 (20.12) 2.09 (9.60)



committee on the board. Thus, this study additionally uses the installation of a

monitoring committee as a proxy for intensive board monitoring. To calculate this

proxy, we sum three dummy variables that take value of 1 if a monitoring commit-

tee is installed (IBMI 4) and 0 otherwise.

3.2.2. Ownership Structure of Controlling Shareholders

In the second part of the article, we investigate the interaction effect between owner-

ship structure of controlling shareholders10 and intensive board monitoring on firm

value. Controlling shareholders exert extensive power by using their direct as well as

indirect ownership leverage (Johnson et al., 2000). Controlling shareholders’ direct

ownership (cash flow rights) is calculated as the sum of the ownership of controlling

shareholders and their relatives (Direct). Controlling shareholders’ indirect ownership

is computed as the sum of affiliates and senior managers of the firm. The control

rights of controlling shareholders are the summation of direct and indirect owner-

ship. When there is a disparity between shareholders’ control rights and cash flow

rights, the controlling shareholders have a strong incentive to maximize the private

benefit of control. We compute the disparity by subtracting controlling shareholders’

direct ownership of each member firm from their control rights (Wedge). Contrarily,

controlling shareholders within chaebols have huge control rights obtained by using

the pyramid ownership structure and cross-holdings through many affiliate firms.

Often, these control rights exceed cash flow rights (Joh, 2003). Thus, whether a firm

belongs to a chaebol is also used as a proxy for the aforementioned disparity. Thus,

to check the robustness of our results, we use a dummy variable that takes the value

of 1 if the firm belongs to a chaebol, and 0, otherwise (Chaebol).

3.3.3. Other Variables

To represent a firm’s value (as an outcome variable), we use Tobin’s Q, which is

the market value of assets (market value of equity plus book value of debt) divided

by the book value of assets (Tobin Q). Since firms with greater assets are more

strictly regulated by the corporate governance-related law in Korea, asset size is a

plausible control variable (Black et al., 2009).11 As such, we include the log of assets

10The goal of this article is to test whether the effect of intensive board monitoring on firm

value is affected by the incentives of controlling shareholders in Korean firms. Since more

than 98% of the sample firms we use have controlling families as the shareholders, we use

the ownerships of controlling families to represent the role of the controlling shareholders.

There are two measures for the ownerships of the controlling families; we calculate the con-

trolling shareholders’ direct ownership as the sum of the ownerships of the controlling share-

holders and their relatives (family ownership), and we calculate the indirect ownership as the

sum of the ownerships of affiliated firms.11After the Asian economic crisis, policy authorities in Korea recognize the limitation of dis-

cipline for managers by market mechanisms and adopt new regulations related to corporate

governance, mainly the board of directors. In 1999, they regulate all listed firms such that the

portion of outside directors on the board is more than 1/4. In 2000, they add a new regula-

tion so that firms with an asset size over two trillion won should have more than three out-

side directors and more than half of the portion of outside directors on the board.

H. S. Byun et al.


to control for any effects related to the size of a firm (Size). We also include the

leverage ratio (Leverage), which is the total leverage divided by total assets, because

higher leverage increases interest costs and default risks and mitigates the problems

associated with overinvestment. We also include net income divided by total assets

in order to control for the effect of profitability on firm value (ROA). We include

the summation of CAPEX and R&D expense divided by sales as a control variable

(Growth). To control for firm-specific risk, we include a standard deviation of daily

stock returns for the past year as a proxy indicator for the risk of the firm (Volatil-

ity). In the empirical analysis for the relationship between intensive board monitor-

ing and firm value, we estimate a simultaneous equation using the instrument

variable (Asset dummy) as a proxy for intensive board monitoring to mitigate the

endogeneity issue. The Asset dummy variable takes a value of 1 if asset size is more

than 2 trillion won, and 0, otherwise.12

3.3. Descriptive Statistics

Panel A in Table 2 presents the sample distribution by year. The sample includes

667 firms, and the data covers 2968 firm-years. Firms are evenly distributed

among sample years. Panel B reports summary statistics of the variables. The

mean of Tobin’s Q is 1.0613. The mean of each index for intensive board moni-

toring is as follows: 0.0848 for IBMI 1, 0.1006 for IBMI 2, 0.2530 for IBMI 3,

and 0.3774 for IBMI 4. The mean of disparity between cash flow rights and con-

trol rights of controlling shareholders (Wedge) is 13.9620, indicating that control-

ling shareholders have excessive control power over the firm. Sample firms have

average assets totaling 1329 billion won; Leverage is 0.4359, and ROA is 0.0297.

The mean of capital expenditure (Growth) is 0.0681, and the mean of the stan-

dard deviation of daily stock returns for the past year (Volatility) is 0.0332.

Among sample firms, 11.49% have more than 2 trillion won in assets, and

23.15% belong to a chaebol conglomerate.

Table 3 illustrates the correlations among the main variables. We find a positive

correlation between the four proxies for intensive board monitoring and the firm’s

value (p < 0.01), which is contrary to findings that use United States firms as data.

Consistent with past research, direct ownership is negatively related to firm value,

which may indicate that excessive ownership on the part of controlling shareholders

has a negative effect on firm value (Stulz, 1988). The four proxies are negatively

correlated with direct ownership of controlling shareholders. This negative relation-

ship may generate bias when we create an interaction variable between the two vari-

ables in the latter part of this article. Therefore, we separate the sample into two

sub-groups on the basis of direct ownership and examine the effect of intensive

board monitoring on firm value in each sub-sample. Direct ownership and disparity

between control rights and cash flow rights are negatively related (p < 0.01).

12Explanation for the instrument variable is available in Section 4.



Table 2 Sample distribution and summary statistics

This table shows the sample distribution and descriptive statistics of variables. Panel A reports the time

series of the sample. Panel B shows the summary statistics for variables. Tobin Q is a proxy for firm value

computed by the market value of assets (market value of equity plus book value of debt) divided by book

value of assets. IBMI 1 is calculated as the average of the portion of outside directors belonging to each

monitoring committee (audit committee, outside director nomination committee, and compensation

committee) out of total outside directors. IBMI 2 is computed by the average composition ratio of out-

side directors in each monitoring committee. IBMI 3 is the summation of the number of monitoring

committees where an outside director is in charge of the chairman. IBMI 4 is calculated by the summa-

tion of the number of monitoring committees on the board. Direct is the summation of ownership of

controlling shareholders and their relatives. Wedge is computed by control rights, which are summations

of direct ownership, ownership of affiliates, and senior managers of the firm minus cash flow rights of

controlling shareholders (direct ownership). Size is total assets in billion won. Leverage is the total lever-

age divided by the total assets. ROA is the ratio of net income to total assets. Growth is calculated by the

summation of CAPEX and R&D expense divided by sales. Volatility is the standard deviation of daily

stock returns for the past year. Asset dummy is a dummy variable that takes a value of 1 if total

assets exceed 2 trillion won. Chaebol is a dummy variable that takes a value of 1 if the firm belongs to

the chaebol conglomerate.

Panel A: Sample distribution by year

Year n Percentage

2005 589 19.85

2006 592 19.95

2007 601 20.25

2008 607 20.45

2009 579 19.51

Total 2968 100.00

Panel B: Summary statistics

Variable n Mean Median Standard deviation Maximum Minimum

Tobin Q 2968 1.0613 0.9174 0.5709 7.3278 0.1883

IBMI 1 2968 0.0848 0.0000 0.1721 1.0000 0.0000

IBMI 2 2968 0.1006 0.0000 0.2092 1.0000 0.0000

IBMI 3 2968 0.2530 0.0000 0.5820 3.0000 0.0000

IBMI 4 2968 0.3774 0.0000 0.7692 3.0000 0.0000

Direct 2968 23.7922 23.1400 19.6808 100.0000 0.0000

Wedge 2968 13.9620 3.2000 18.7498 93.5400 0.0000

Size 2968 1329 217 4657 86 024 9

Leverage 2968 0.4359 0.4489 0.1934 0.9419 0.0100

ROA 2968 0.0297 0.0363 0.0824 0.4355 -0.7530

Growth 2968 0.0681 0.0399 0.1004 1.8712 0.0000

Volatility 2968 0.0332 0.0310 0.0117 0.1243 0.0000

Asset dummy 2968 0.1149 0.0000 0.3189 1.0000 0.0000

Chaebol 2968 0.2315 0.0000 0.4218 1.0000 0.0000

H. S. Byun et al.


Table

3Correlation

This

table

showsthecorrelationam

ongvariables.Thedefinitionsofvariablesaresameas

those

inTable

2.Thehighlightedcoefficients

aresignificantat

leastat

the

0.05

level.

Tobin

QIBMI1

IBMI2

IBMI3

IBMI4

Direct

Wedge

Size

Leverage

ROA

Growth

Volatility

Asset

Dummy

IBMI1

0.154

IBMI2

0.171

0.933

IBMI3

0.170

0.842

0.936

IBMI4

0.165

0.935

0.981

0.901

Direct

�0.127

�0.104

�0.135

�0.146

�0.139

Wedge

�0.008

0.011

0.010

0.019

0.011

�0.515

Size

0.092

0.583

0.681

0.631

0.676

�0.163

0.077

Leverage

0.092

0.124

0.136

0.108

0.135

�0.180

0.058

0.172

ROA

0.094

0.092

0.102

0.101

0.101

0.117

0.006

0.212

�0.234

Growth

0.141

0.069

0.075

0.071

0.080

�0.056

0.029

0.044

�0.054

�0.069

Volatility

0.151

�0.083

�0.090

�0.104

�0.089

�0.091

0.013

�0.238

0.231

�0.308

0.070

Asset

Dummy

0.124

0.633

0.778

0.722

0.777

�0.178

0.023

0.732

0.157

0.082

0.062

�0.060

Chaebol

0.159

0.451

0.511

0.464

0.501

�0.193

0.203

0.601

0.124

0.098

0.039

�0.114

0.534



4. Empirical Results

4.1. Impact of Intensive Board Monitoring on Firm Value in Korea

4.1.1. Univariate Results

Table 4 shows the results for firms with high- and low- levels of intensive board

monitoring. We separate the sample into two sub-samples based on whether the

board committee contains outside directors. If we divide the sample based on the

median of IBMI proxies, we obtain similar sub-samples because many firms do not

have a monitoring committee. Firms with outside directors in their monitoring

committee have higher firm value than those that do not (p < 0.01). These firms

can monitor managers efficiently, as they can handle the expense costs to do so. In

the United States board monitoring is negatively related to firm value because of

monitoring costs; however, we find that the benefit of the monitoring outweighs its

costs in an emerging market such as Korea. Firms with outside directors on their

monitoring committee have lower levels of direct ownership on the part of control-

ling shareholders. These firms tend to be large and experience greater leverage, prof-

itability, growth, and low volatility. Firms with outside directors on the monitoring

committee are also more likely to be in a chaebol group.

4.1.2. Multivariate Results

In addition to the univariate analysis described above, we also perform regressions

to examine the effect of intensive board monitoring on firm value. To alleviate any

interpersonal/intragroup correlation in the residuals, and to avoid serial correlation

Table 4 Univariate test

This table shows the differences in variables between firms with high intensity of board monitoring and

those with low levels of board monitoring. We separate the sample into two samples based on whether

the monitoring committee contains outside directors. The definitions of variables are same as those in

Table 2, but Size is the natural log of total assets. ***, **, and * denote significance at the 1%, 5%, and

10% level, respectively.

Variables

Firms without

outside director

in monitoring

committee [n = 2322]

Firms with

outside director

in monitoring

committee [n = 646]

Difference (p-value)

t-test

Wilcoxon

ranked sum test

Tobin Q 1.0124 1.2372 0.0000*** 0.0000***

Direct 24.7944 20.1900 0.0000*** 0.0000***

Wedge 13.7739 14.6380 0.2737 0.0147**

Size 19.0308 21.1880 0.0000*** 0.0000***

Leverage 0.4229 0.4826 0.0000*** 0.0000***

ROA 0.0249 0.0469 0.0000*** 0.0000***

Growth 0.0645 0.0810 0.0014*** 0.0000***

Volatility 0.0338 0.0312 0.0000*** 0.0000***

Asset dummy 0.0056 0.5077 0.0000*** 0.0000***

Chaebol 0.1270 0.6068 0.0000*** 0.0000***

H. S. Byun et al.


and heteroskedasticity in the panel data, we use robust standard errors to test the

significance of the coefficients. We include an industry dummy in this regression

equation to control for industry effect. Finally, we also include a year dummy to

control for any effects that may be explained by the year in which it was demon-

strated. The definitions of the variables included in the empirical model below can

be found in Section 3.2 and Appendix I.

Tobin Qit ¼ b0 þ b1IBMIit þ b2Sizeit þ b3Leverageit þ b4ROAit þ b5Growthit þ b6Volatilityit þ eitð1Þ

Because board characteristics are determined endogenously (Linck et al., 2008)

and empirical results can illustrate the endogeneity problem, we use several

approaches to address these concerns. First, we use a lagged independent variable

(t � 1). Second, we estimate the robust standard error incorporating firm-level

clustering. Third, we examine the robustness of our results after including lagged

values of our dependent variable.13 Finally, we estimate the simultaneous equation

using an instrument variable for proxies for intensive board monitoring. After the

economic crisis in Korea, the government has required large firms (those with assets

in excess of 2 trillion won) to have boards of directors comprised of no less than

50% outside directors. Further, large firms are required to have the auditing com-

mittee and outside director nominate the directors. Thus, we use a dummy variable

that takes a value of 1 if the asset size is more than 2 trillion won (Asset dummy) as

an instrument for intensive board monitoring (Black et al., 2009). A valid instru-

ment must be exogenous, correlated with the instrumented variable (IBMI), and

indirectly predictive of the dependent variable through the instrumented variable.

The correlation between the Asset dummy and IBMI is high (about 63–78%,

p < 0.01).14

4.1.3. Impact of Intensive Board Monitoring on Firm Value

Table 5 reports the effect of IBMI on firm value. In Model (1), IBMI 1 has a signifi-

cantly positive effect on firm value (p < 0.01) after controlling for firm-specific

variables, industry effect, and year effect. This result indicates that IBM mitigates

agency problems and increases firm value. In Models (2)–(4), IBMI 2, IBMI 3, and

IBMI 4 positively predict firm value (p < 0.01). Previous studies have found that in

the United States, the costs of intensive board monitoring outweigh the benefits

associated with it. They have shown that intensive board monitoring deters infor-

mation sharing among board members such that the board cannot provide strategic

advice; therefore, firm value decreases. However, as shown in Table 5, in an emerg-

ing market like Korea, intensive board monitoring is positively related to firm value.

We interpret this to mean that the benefits of intensive board monitoring are

13These methods are used in Linck et al. (2008) to address the endogeneity problem.14The validity of this instrument variable refers to Black et al. (2009), and Black and Kim

(2011).



greater in emerging markets because they have a less developed capital market and

a low level of shareholders’ rights protection. Therefore, the results of previous

studies that focused on developed economies cannot be generalized to an emerging

economy like Korea. This supports hypothesis 1.15

In addition, leverage is shown to be a positive predictor of firm value as debt

decreases agency problems and produces tax shield. Profitability, growth, and vola-

tility are also positively related to firm value.

Table 5 Impact of intensive board monitoring on firm value

This table reports results from an analysis that regressed the firm value on proxies for intensive board

monitoring and firm characteristics. Tobin Q is a proxy for firm value computed by the market value of

assets (market value of equity plus book value of debt) divided by the book value of assets. IBMI 1 is cal-

culated as the average of the portion of outside directors belonging to each monitoring committee (audit

committee, outside director nominate committee, and compensation committee) out of total outside

directors. IBMI 2 is computed by the average composition ratio of outside directors in each monitoring

committee. IBMI 3 is the summation of the number of monitoring committees where an outside director

is in charge of the chairman. IBMI 4 is calculated by the summation of the number of monitoring com-

mittees on the board. Size is the natural log of total assets. Leverage is the total leverage divided by the

total assets. ROA is the ratio of net income to total assets. Growth is calculated by the summation of

CAPEX and R&D expense divided by sales. Volatility is the standard deviation of daily stock returns for

the past 1 year. Industry effect is an industry dummy variable based on 1-digit of Korea Standard Indus-

try Classification (KSIC). Year effect is the year dummy variable. The numbers in the square brackets are

t-statistics computed by robust standard error. ***, **, and * denote significance at the 1%, 5%, and 10%

level, respectively.

Model (1) Model (2) Model (3) Model (4)

Intercept �0.2062 [�1.29] 0.0730 [0.40] �0.0214 [�0.13] �0.0116 [�0.06]

IBMI 1 0.3838 [5.52]***

IBMI 2 0.3978 [5.88]***

IBMI 3 0.1348 [5.67]***

IBMI 4 0.0982 [5.56]***

Size 0.0255 [3.23]*** 0.0121 [1.31] 0.0172 [2.04]** 0.0161 [1.77]*

Leverage 0.2266 [3.62]*** 0.2282 [3.65]*** 0.2343 [3.76]*** 0.2301 [3.69]***

ROA 1.1150 [5.46]*** 1.1273 [5.55]*** 1.1265 [5.55]*** 1.1262 [5.54]***

Growth 0.5971 [3.24]*** 0.5950 [3.27]*** 0.5991 [3.36]*** 0.5929 [3.25]***

Volatility 13.5125 [10.17]*** 13.2662 [9.98]*** 13.4441 [10.15]*** 13.3087 [9.99]***

Industry

effect

Yes Yes Yes Yes

Year

effect

Yes Yes Yes Yes

n 2968 2968 2968 2968

Adj-R2 0.196 0.198 0.198 0.196

15In unreported results, we separately test the effect of the auditing, compensation, and nom-

ination committees on firm value, and obtain the consistent results as above. All the commit-

tees have statistically positive effects on firm value.

H. S. Byun et al.


4.1.4. Controlling for the Endogeneity Problem

There can be serious concerns about endogeneity between the board structure and

firm value. Intensive board monitoring could indeed increase firm value (Weisbach,

1988), but it is also possible that highly valued firms have increased levels of moni-

toring. Firm value is determined by various firm-specific characteristics that could

also drive the structure of the firm’s board. To alleviate these concerns, we estimate

several statistical models. Models (1)–(4) in Panel A of Table 6 report the results

using dependent variables of time t and independent variables of time t � 1. IBMIs

have a positive effect on Tobin’s Q (p < 0.01). In Models (5)–(8), we estimate the

robust standard error by incorporating firm-level clustering. These models demon-

strate that IBMIs have a strongly positive effect on Tobin’s Q. In Models (9)–(12),we include a lagged value of Tobin Q. Although the significance level of IBMIs

decreases slightly, they still exert a significant effect on Tobin Q (p < 0.05). In panel

B, we estimate a simultaneous equation framework by using the Asset dummy vari-

able as the instrument variable for IBMIs. In Models (2), (4), (6), and (8), the Asset

dummy has a strong, positive effect on IBMIs, as predicted. In Models (1), (3), (5),

and (7), the predicted value of IBMIs has a significantly positive effect on Tobin Q

(p < 0.01), which is the same as those in Table 5. These results indicate the robust-

ness of our results and alleviate any concerns regarding the endogeneity issue.

4.1.5. Sub-Sample Analysis

As we mentioned in Table 1, IBMIs are contingent upon whether firms have outside

directors on the monitoring committee. Since many firms do not have a monitoring

committee, these firms’ IBMIs have a value of zero. Therefore, due to the number

of firms with a value of zero value for their IBMIs, the effect of the variation of

IBMIs on Tobin’s Q may not be correctly captured when we use the whole sample.

To analyze the effect of IBMIs variation on Tobin’s Q, we estimate the same empiri-

cal model in a sample of firms with outside directors on their monitoring commit-

tee. In Table 7, IBMI 2 has a significant effect on Tobin’s Q at (p < 0.05). This

indicates that an increase in the composition ratio of outside directors on a moni-

toring committee raises a firm’s value. Similarly, IBMI 3 has a significant effect on

Tobin’s Q (p < 0.05). The increase in the number of outside directors on a moni-

toring committee contributes to the improvement in shareholder value. IBMI 1 and

IBMI 4 are positively associated with firm value, but these relationships are not sta-

tistically significant.

4.2. Impact of Interaction Between Intensive Board Monitoring and Ownership

Structure of Controlling Shareholders on Firm Value

4.2.1. Univariate Test

The main goal of this article is to show that intensive board monitoring has a posi-

tive impact on firm value in an emerging market. We find that the benefits of

intensive board monitoring exceed its costs. In analyzing firms in an emerging mar-

ket, ownership structure may be revealed as an important issue that should be clo-

sely examined. For example, many firms in Korea have a concentrated ownership



Table

6Im

pactofintensive

boardmonitoringonfirm

value:endogeneity

issue

This

table

reportsresultsfrom

regressingthefirm

valueonproxies

forintensive

boardmonitoringandfirm

characteristics.

Thedefinitionsofvariablesaresameas

those

inTable

5.Asset

dummyis

adummyvariable

that

takesavalueof1iftotalassets

exceed

2trillionwon.Thenumbersin

squarebracketsaret-statistics

com-

putedbyrobust

standarderror,butthose

inmodel

(5)–(8)arecomputedbyclustered

standarderrorincorporatingfirm

level.***,

**,and*denote

sign

ificance

atthe

1%,5%

,and10%

level,respectively.

PanelA:Alternativeapproachto

controlfortheendogeneity

problem

Laggedvariableapproach

Clustered

standarderrorincorporatingfirm

level

IncludeTobin

Q(t

�1)

Model(1)

Model(2)

Model(3)

Model(4)

Model(5)

Model(6)

Model(7)

Model(8)

Model(9)

Model(10)

Model(11)

Model(12)

Intercept

0.0754

[0.49]

0.3660

[2.04]**

0.1847

[1.10]

0.3182

[1.81]*

�0.2062

[�0.83]

0.0730

[0.25]

�0.0214

[�0.08]

�0.0116

[�0.04]

�0.0908

[�0.74]

0.0059

[0.04]

�0.0035

[�0.03]

�0.0364

[�0.26]

IBMI1

0.4271

[5.90]***

0.3838

[3.18]***

0.1197

[2.42]**

IBMI2

0.4318

[6.43]***

0.3978

[3.35]***

0.1292

[2.59]***

IBMI3

0.1302

[5.58]***

0.1348

[3.33]***

0.0484

[2.78]***

IBMI4

0.1130

[6.41]***

0.0982

[3.21]***

0.0296

[2.25]**

Tobin

Q

(t�

1)

0.6203

[13.62]***

0.6194

[13.58]***

0.6191

[13.61]***

0.6202

[13.58]***

Control

variables

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Industry

effect

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Year

effect

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

n2946

2946

2946

2946

2968

2968

2968

2968

2897

2897

2897

2897

Adj-R2

0.150

0.152

0.149

0.151

0.196

0.198

0.198

0.196

0.557

0.557

0.557

0.557

H. S. Byun et al.


PanelB:Simultaneousequationfram

ework

Dependent

variable

Tobin

QIBMI1

Tobin

QIBMI2

Tobin

QIBMI3

Tobin

QIBMI4

Model(1)

Model(2)

Model(3)

Model(4)

Model(5)

Model(6)

Model(7)

Model(8)

2stage

1stage

2stage

1stage

2stage

1stage

2stage

1stage

Intercept

0.7978

[2.50]**

�0.5297

[�9.48]***

0.6878

[2.40]**

�0.6062

[�10.44]***

0.6678

[2.39]**

�1.4574

[�9.14]***

0.6779

[2.39]**

�2.1514

[�10.07]***

IBMI1

(estim

ated)

0.6719

[3.19]***

IBMI2

(estim

ated)

0.4057

[3.22]***

IBMI3

(estim

ated)

0.1550

[3.23]***

IBMI4

(estim

ated)

0.1097

[3.21]***

Size

�0.0142

[�0.85]

0.0296

[10.22]***

�0.0079

[�0.53]

0.0336

[11.12]***

�0.0072

[�0.49]

0.0832

[10.00]***

�0.0074

[�0.50]

0.1197

[10.79]***

Leverage

0.2290

[3.82]***

0.0123

[0.98]

0.2358

[3.95]***

0.0038

[0.29]

0.2425

[4.06]***

�0.0336

[�0.87]

0.2359

[3.95]***

0.0130

[0.28]

ROA

1.1594

[5.39]***

0.0163

[0.46]

1.1651

[5.44]***

0.0131

[0.43]

1.1658

[5.47]***

0.0294

[0.31]

1.1647

[5.43]***

0.0515

[0.44]

Growth

0.7465

[3.42]***

0.0538

[1.94]*

0.7591

[3.58]***

0.0581

[2.47]**

0.7579

[3.65]***

0.1599

[2.16]**

0.7552

[3.54]***

0.2509

[2.74]***

Volatility

8.9692

[7.58]***

0.0119

[0.06]

8.9682

[7.60]***

0.0220

[0.11]

9.1100

[7.77]***

�0.8571

[�1.33]

8.9674

[7.59]***

0.0891

[0.12]

Asset

dummy

0.2380

[17.28]***

0.3942

[26.46]***

1.0315

[21.57]***

1.4580

[27.57]***

n2968

2968

2968

2968

2968

2968

2968

2968

Adj-R2

0.086

0.431

0.094

0.632

0.095

0.544

0.092

0.629

Tabel

6(C

ontinued)



structure and controlling shareholders have excessive influence on the corporate

decision-making process. Thus, we examine the effect of the interaction between

intensive board monitoring and controlling shareholders’ ownership to find the

influence of ownership structure on the efficiency of intensive board monitoring.

In Panel A of Table 8, we divide the sample into two sub-samples on the basis

of the median level of direct ownership among controlling shareholders and com-

pare the effects of intensive board monitoring on firm value (as in Table 4) for

each sample. Firms with a high level of IBMI have higher firm value in both sub-

samples (p < 0.01 in both cases). To explore the moderating effect of firm owner-

ship structure on the relationship between intensive board monitoring and firm

value, we perform a difference-in-difference analysis for each sub-sample. IBMI has

a greater marginal effect on firm value for firms with high levels of direct owner-

ship among controlling shareholders than those with low direct ownership

(p < 0.01). Because controlling shareholders have a higher degree of direct owner-

ship, conflicts of interests between them and minority shareholders decreases so

that the positive influence of intensive board monitoring on firm value can

increase.

If controlling shareholders have control rights that exceed their cash flow rights,

they are likely to pursue private benefit of control, and thus, have a negative effect

Table 7 Sub-sample analysis

This table reports results from regressing the firm value on proxies for the intensity of board monitoring

and firm characteristics. The definitions of variables are same as those in Table 5. The numbers in the

square brackets are t-statistics computed by robust standard error. ***, **, and * denote significance at

the 1%, 5%, and 10% level, respectively.

Model (1) Model (2) Model (3) Model (4)

Intercept 0.5157 [1.59] 0.8455 [2.55]** 0.7657 [2.42]** 0.7215 [2.17]**

IBMI 1 0.0702 [0.43]

IBMI 2 0.3241 [2.14]**

IBMI 3 0.0849 [2.54]**

IBMI 4 0.0591 [1.21]

Size 0.0046 [0.34] �0.0178 [�1.19] �0.0116 [�0.79] �0.0100 [�0.68]

Leverage 0.4942 [3.47]*** 0.5006 [3.51]*** 0.5071 [3.56]*** 0.5073 [3.66]***

ROA 3.5118 [4.20]*** 3.5517 [4.27]*** 3.5239 [4.23]*** 3.5444 [4.32]***

Age �0.0211 [�0.07] �0.0177 [�0.06] �0.0117 [�0.04] �0.0277 [�0.09]

Growth 0.9018 [0.25] 1.0633 [0.30] 1.4515 [0.41] 0.8341 [0.23]

Volatility 0.0046 [0.34] �0.0178 [�1.19] �0.0116 [�0.79] �0.0100 [�0.68]

Industry

effect

Yes Yes Yes Yes

Year

effect

Yes Yes Yes Yes

n 646 646 646 646

Adj-R2 0.165 0.170 0.172 0.167

H. S. Byun et al.


on shareholder value. Therefore, this study splits the overall sample into two groups

based on the median of disparity between controlling shareholders’ cash flow rights

and control rights. Further, it investigates the effect of intensive board monitoring

on firm value using a difference-in-difference analysis. Panel B presents these

results. Firms with high monitoring intensity have higher firm value. The differ-

ences in firm value according to intensive board monitoring is significantly greater

for a group of firms with low disparity, indicating that the marginal effect of inten-

sive board monitoring on firm value is greater for firms with low disparity. Since

controlling shareholders in firms with high disparity pursue a private benefit of

control, the efficiency of intensive board monitoring diminishes.

4.2.2. Multivariate Test

In addition to the univariate tests presented above, this study also investigates

whether the effect of board monitoring on firm value differs as a result of the

ownership structure of controlling shareholders by using interaction variables and

Table 8 Univariate test: difference in the effect of intensive board monitoring on firm valuebased on the ownership structure of controlling shareholders

This table shows the differences in firm value between firms with high intensity of board monitoring and

those with low level of board monitoring in each separated sample based on the ownership structure of

controlling shareholders. In panel A, we divide the sample into two sub-samples based on the median of

direct ownership of controlling shareholders, and compare the effect of intensive monitoring of the board

(whether monitoring committee contains outside directors or not) on firm value in each sample. In panel

B, we separate the sample into two groups based on the median of the wedge between cash flow rights

and control rights of controlling shareholders, and compare the effect of intensive monitoring of the

board on the firm value in each sample. Tobin Q is a proxy for firm value computed by the market value

of assets (market value of equity plus book value of debt) divided by the book value of assets. Direct

ownership (Direct) is the summation of ownership of controlling shareholders and their relatives. Wedge

is computed by the control rights, which are the summation of direct ownership, ownership of affiliates,

and senior managers of the firm, minus cash flow rights of controlling shareholders (direct ownership).

The numbers in the parenthesis are t-statistics. ***, **, and * denote significance at the 1%, 5%, and

10% level, respectively.

Ownership

structure

Firms without

outside director

in monitoring

committee [n = 2322]

Firms with

outside director

in monitoring

committee [n = 646] Difference

Panel A: Separated sample based on direct ownership

High (A) [n = 1295] 0.9485 [n = 287] 1.2334 �0.2849 (�6.84)***

Low (B) [n = 1027] 1.0930 [n = 359] 1.2403 �0.1473 (�4.10)***

(A) � (B) �0.1375 (�2.74)***

Panel B: Separated sample based on wedge

High (A) [n = 1145] 1.0093 [n = 352] 1.1170 �0.1077 (�3.80)***

Low (B) [n = 1177] 1.0154 [n = 294] 1.3812 �0.3658 (�7.78)***

(A) � (B) 0.2581 (5.16)***



comparing coefficients of distinct sub-samples. The definition of these variables can

be found in Section 3.2 and Appendix I.

Tobin Qit ¼ b0 þ b1IBMIit þ b2IBMIit � Directit þ b3IBMIit �Wedgeit þ b4Directitþ b5Wedgeit þ b6Sizeit þ b7Leverageit þ b8ROAit þ b9Growthitþ b10Volatilityit þ eit

ð2Þ

4.2.3. Impact of Interaction Between Intensive Board Monitoring and Direct

Ownership of Controlling Shareholders on Firm Value

Panel A in Table 9 presents results using the interaction variable approach. In Mod-

els (1) and (2), using the proportion of outside directors who are on monitoring

committees out of total outside directors (IBMI 1), the interaction variable between

IBMI 1 and direct ownership of controlling shareholders has a significantly positive

coefficient (p < 0.01). Consistent with the theory that argues that a more direct own-

ership negatively affects corporate control and firm value, direct ownership is found

to have a significant, negative relationship with firm value. In addition to the interac-

tion variables that are comprised of continuous indicators, we also use a dummy var-

iable for interpretational convenience. The Direct dummy in Model (2) has a value of

1 if the direct ownership of controlling shareholders is larger than the median. IBMI

1 has a positive and significant coefficient (p < 0.01), and the interaction variable

between IBMI 1 and Direct dummy has a significant and positive coefficient (0.3150)

at the 0.01 level. Thus, the positive influence of intensive board monitoring on firm

value is 31.50% larger for firms with high direct ownership of controlling sharehold-

ers. This result demonstrates that the positive influence of intensive board monitor-

ing on firm value is greater for firms in which controlling shareholders have a more

direct ownership. Similar results are obtained by using IBMI 2 in Models (3) and

(4), IBMI 3 for Models (5) and (6), and IBMI 4 for Models (7) and (8). These results

reveal a complementary relationship between intensive board monitoring and direct

ownership on firm value. These findings support hypothesis 2.

Due to the high correlation between IBMIs and direct ownership of controlling

shareholders, there could be some bias in these analyses. Thus, we perform a med-

ian split of the overall sample on the basis of shareholders’ direct ownership. From

here, we compare the effect of board monitoring on firm value in each sample.

Panel B provides these results. Model (1) contains the results for the sample of

firms for whom controlling shareholders have low levels of direct ownership; in this

model, IBMI 1 is a significant, positive predictor of firm value. In Model (2), for

firms in which shareholders have high levels of direct ownership, IBMI 1 has a sig-

nificantly positive coefficient (p < 0.01). In the last row of Panel B, the difference

in the coefficients between the two sub-samples16 is marginally significant

16We use an asymptotic t-ratio measured by differences between coefficient estimates for an

Intensive Board Monitoring Index (IBMI) in a separated sample divided by the root of sum

of their squared standard errors (Lee and Park, 2009).

H. S. Byun et al.


Table

9Im

pactofintensive


valuebased

ondirectownership

ofcontrollingshareholder

Thistable

reportsresultsfrom

regressingthefirm

valueontheinteractionbetweenintensive

boardmonitoringanddirectownership

ofcontrollingshareholders.Panel

Ashowsresultsusinginteractionvariable

betweenproxies

forintensive

monitoringoftheboardanddirectownership

(ordummyvariable).

Panel

Breportsresults

usingaseparated

sample

based

onthemedianofdirectownership

ofcontrollingshareholders.Directis

thesummationofownership

ofcontrollingshareholdersand

theirrelatives.Directdummyisadummyvariable

that

takesavalueof1ifdirectownership

ofcontrollingshareholdersisoverthemedianin

thesample.Thedefini-

tionsofvariablesaresameas

those

inTable

5.Thenumbersin

thesquarebracketsaret-statistics

computedbyrobust

standarderrorincorporatedat

thefirm

level.

***,

**,and*denote

significance

atthe1%

,5%

,and10%

level,respectively.

Panel

A:Interactionvariable

approach

IBMI1

IBMI2

IBMI3

IBMI4

Model

(1)

Model

(2)

Model

(3)

Model

(4)

Model

(5)

Model

(6)

Model

(7)

Model

(8)

Intercept

�0.0409

[�0.25]

�0.0763

[�0.47]

0.2370

[1.27]

0.2068

[1.13]

0.1511

[0.88]

0.1214

[0.71]

0.1460

[0.79]

0.1110

[0.61]

IBMI(A

)0.1943

[2.02]**

0.2391

[2.84]***

0.2368

[2.72]***

0.2695

[3.43]***

0.0745

[2.60]***

0.0873

[3.30]***

0.0552

[2.44]**

0.0627

[3.06]***

(A)*(B)

0.0089

[2.64]***

0.0082

[2.92]***

0.0036

[3.12]***

0.0022

[2.94]***

(A)*(C

)0.3150

[2.69]***

0.3107

[3.12]***

0.1318

[3.27]***

0.0858

[3.28]***

Direct(B)

�0.0033

[�6.19]***

�0.0033

[�6.14]***

�0.0033

[�6.07]***

�0.0033

[�6.07]***

Direct

dummy(C

)

�0.1087

[�4.99]***

�0.1101

[�5.01]***

�0.1079

[�4.96]***

� 0.1098

[�4.95]***

Control

variables

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Industry

effect

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Year

effect

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

n2968

2968

2968

2968

2968

2968

2968

2968

Adj-R2

0.205

0.202

0.208

0.205

0.209

0.206

0.206

0.203



Panel

B:Separated

sample

approach

IBMI1

IBMI2

IBMI3

IBMI4

Model

(1)

Model

(2)

Model

(3)

Model

(4)

Model

(5)

Model

(6)

Model

(7)

Model

(8)

Low

High

Low

High

Low

High

Low

High

Intercept

0.2136

[0.87]

�0.3609

[�1.65]*

0.4402

[1.53]

�0.0446

[�0.19]

0.3145

[1.20]

�0.1505

[�0.66]

0.3586

[1.25]

�0.1235

[�0.53]

IBMI

0.2971

[3.20]***

0.5319

[5.15]***

0.3052

[3.24]***

0.5610

[5.68]***

0.0949

[3.07]***

0.2088

[5.20]***

0.0725

[2.95]***

0.1462

[5.66]***

Control

variables

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Industry

effect

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Year

effect

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

n1386

1582

1386

1582

1386

1582

1386

1582

Adj-R2

0.173

0.236

0.174

0.240

0.174

0.241

0.173

0.238

Low

vs.

High

(t-statistics)

1.70*

2.01**

2.60***

2.13**

Tabel

9(C

ontinued)

H. S. Byun et al.


(p < 0.10), suggesting that the effect of IBMIs varies according to the ownership

structure of controlling shareholders. We find consistent results using IBMI 2 in

Models (3) and (4), using IBMI 3 in Models (5) and (6), and using IBMI 4 in

Models (7) and (8).

In sum, we find that intensive board monitoring has a more positive influence

on firm value in firms in which controlling shareholders have high direct owner-

ship. Since conflicts of interest between controlling shareholders and minority

shareholders is diminished, as controlling shareholders have more direct ownership,

the positive effect of intensive board monitoring on firm value increases. It shows

that intensive board monitoring and direct ownership of controlling shareholders

have a complementary relationship. In an emerging market where external corpo-

rate governance mechanisms are not fully developed and manager discipline is pri-

marily dependent on internal governance mechanisms, ownership structure is a

critical source of internal discipline.

4.2.4. Impact of Interaction Between Intensive Board Monitoring and Wedge of

Controlling Shareholders on Firm Value

Controlling shareholders pursue private benefits of control as their control rights

exceed their cash flow rights. We analyze whether the wedge between their control

rights and cash flow rights influence the effect of board monitoring on firm value.

Panel A in Table 10 shows the results of this analysis. In Model (1), the interaction

variable between IBMI 1 and Wedge is a significant negative predictor of firm value

(p < 0.01). This implies that the marginal effect of intensive board monitoring on

firm value decreases as Wedge increases. In Model (2), we use a dummy variable that

takes the value of 1 if the wedge is larger than the median. The interaction variable

between IBMI 1 and the Wedge dummy variable also demonstrates a significantly

negative relationship with firm value (p < 0.01). In the sample of firms with high

disparity, the effect of intensive board monitoring on the firm value is lower. When

we use IBMI 2 in Models (3) and (4), IBMI 3 in Models (5) and (6), and IBMI 4 in

Models (7) and (8), we get similar results. As controlling shareholders are more

likely to pursue private control in firms with high wedge, the marginal effect of

board monitoring on firm value decreases; this result supports hypothesis 3.

In Panel B, we divide the whole sample into two sub-samples based on wedge

and compare the effect of board monitoring on firm value in each sub-sample. In

Model (1), the IBMI 1 is significantly and positively related to firm value (p < 0.01)

for firms with low wedge. However, in Model (2), IBMI 1 is not a significant pre-

dictor of firm value for firms with high wedge. The difference in coefficients

between the two sub-samples is significant (p < 0.01), indicating that the effect of

board monitoring differs according to the wedge between cash flow rights and con-

trol rights. We find the same results using IBMI 2 in Models (3) and (4), using

IBMI 3 in Models (5) and (6), and using IBMI 4 in Models (7) and (8).

As the wedge between cash flow rights and control rights increases, controlling

shareholders are more likely to pursue private control, and therefore, the positive

effect of intensive board monitoring on firm value is reduced. This result indicates



Table

10Im

pactofintensive


valuebased

onwedge

ofcontrollingshareholder

Thistable

reportsresultsfrom

regressingthefirm


boardmonitoringandwedge


Ashows

resultsusinginteractionvariable

betweenproxies

forintensive

monitoringoftheboardandwedge

(ordummyvariable).PanelBreportsresultsusingaseparated

sam-

ple

based

onthemedianofthewedge

ofcontrollingshareholders.Wedge

iscomputedbythecontrolrights,whicharesummationofdirectownership,ownership

of

affiliates,andseniormanagersofthefirm

minuscash

flow

rights

ofcontrollingshareholders(directownership).Wedge

dummyisadummyvariable

that

takesavalue

of1ifthewedge

ofcontrollingshareholdersis

overthemedianin

thesample.Thedefinitionsofvariablesaresameas

those

inTable

5.Thenumbersin

thesquare

bracketsaret-statistics

computedbyrobuststandarderrorincorporatedat

thefirm

level.***,**,and*denote

significance

atthe1%

,5%

,and10%

level,respectively.

Panel


approach

IBMI1

IBMI2

IBMI3

IBMI4

Model

(1)

Model

(2)

Model

(3)

Model

(4)

Model

(5)

Model

(6)

Model

(7)

Model

(8)

Intercept

�0.2311

[�1.43]

�0.2401

[�1.50]

0.0446

[0.24]

0.0141

[0.08]

�0.0272

[�0.16]

�0.0579

[�0.34]

�0.0401

[�0.22]

�0.0657

[�0.36]

IBMI(A

)0.5419

[6.27]***

0.6167

[6.13]***

0.5317

[6.71]***

0.5756

[6.49]***

0.1852

[6.13]***

0.2015

[5.73]***

0.1356

[6.62]***

0.1477

[6.44]***

(A)*(B)

�0.0118

[�3.68]***

�0.0102

[�3.67]***

�0.0035

[�3.51]***

�0.0028

[�3.92]***

(A)*(C

)�0

.4774

[�4.16]***

�0.3741

[�4.04]***

�0.1292

[�3.54]***

�0.1025

[�4.19]***

Wedge

(B)

0.0004

[0.68]

0.0005

[0.77]

0.0003

[0.53]

0.0005

[0.79]

Wedge

dummy(C

)

�0.0252

[�1.24]

�0.0258

[�1.27]

�0.0330

[�1.65]*

�0.0255

[�1.25]

Control

variables

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Industry

effect

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Year

effect

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

n2968

2968

2968

2968

2968

2968

2968

2968

Adj-R2

0.199

0.204

0.202

0.205

0.202

0.205

0.200

0.204

H. S. Byun et al.


Panel

B:Separated

sampleapproach

IBMI1

IBMI2

IBMI3

IBMI4

Model

(1)

Model

(2)

Model

(3)

Model

(4)

Model

(5)

Model

(6)

Model

(7)

Model

(8)

Low

High

Low

High

Low

High

Low

High

Intercept

�0.1317

[�0.57]

�0.2839

[�1.29]

0.2650

[0.99]

�0.1488

[�0.59]

0.0357

[0.14]

�0.1050

[�0.46]

0.1456

[0.55]

�0.2051

[�0.82]

IBMI

0.6796

[6.36]***

0.0976

[1.08]

0.6611

[6.62]***

0.1333

[1.59]

0.2183

[5.65]***

0.0588

[2.18]**

0.1682

[6.54]***

0.0287

[1.25]

Control

variables

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Industry

effect

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Year

effect

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

n1471

1497

1471

1497

1471

1497

1471

1497

Adj-R2

0.227

0.192

0.229

0.193

0.227

0.194

0.227

0.192

Low

vs.

High

(t-statistics)

�4.23***

�4.18***

�3.73***

�4.08***

Tabel

10(C

ontinued)



that firms should have a strong board as well as an effective ownership structure to

efficiently discipline managers.

4.2.5. Chaebol Issue

Existing literature indicates that controlling shareholders within Korean chaebols

have excessive control over their cash flow rights through the strategic use of pyra-

mid ownership structures and cross-holdings among affiliate firms. Controlling

shareholders with high control rights tend to pursue private control and diminish

shareholder value in the process. To test the robustness of these assertions, we treat

membership in a chaebol as a proxy for excessive control rights and investigate

whether high control rights diminish the efficiency of board monitoring.

In Panel A of Table 11, the negative coefficients of the interaction variable

between IBMIs and the Chaebol dummy variable show that the positive effect of

intensive board monitoring on firm value is weak for firms that belong to a chaebol

conglomerate. This result supports hypothesis 4. Using the separated sample

approach in Panel B, the differences in the coefficients of four IBMIs in each sample

of chaebol and non-chaebol firms are found to be significant.

5. Conclusion

Previous studies that have analyzed developed countries have revealed that intensive

board monitoring has a negative influence on firm value, as strong monitoring

engenders a lack of communication and a decrease in strategic advice from outside

directors. However, in emerging markets where external control mechanisms are

not fully developed, disciplining of managers is highly dependent on internal corpo-

rate governance. As a result, board monitoring could have a different effect on firm

value. In investigating the effect of intensive board monitoring on firm value, we

utilized four IBMIs as outlined above. We found that intensive board monitoring

has a positive influence on firm value in emerging markets. This result runs con-

trary to those of existing studies, which use developed countries as their primary

source of data. These results also show that the benefits of board monitoring out-

weigh its costs in emerging markets. This emphasizes the importance of the board

as internal corporate governance and highlights the differences in discipline mecha-

nisms between emerging and developed countries.

The effect of intensive board monitoring on firm value can be influenced

according to the ownership structure of the firm, because controlling shareholders

in emerging markets with concentrated ownership structure have great influence on

corporate managerial decision processes. This article has examined the relationship

between intensive board monitoring and firm value contingent on ownership struc-

ture to reveal practical implications for companies. When controlling shareholders

have high levels of direct ownership, conflicts of interest between controlling share-

holders and minority shareholders are reduced and the efficiency of intensive board

monitoring increases. The incentive to monitor managers is complementary to

intensive board monitoring. Further, the wedge between cash flow rights and con-

H. S. Byun et al.


Table

11Im

pactofintensive


valuebased

onchaebol

Thistable

reportsresultsfrom

regressingthefirm


boardmonitoringandwedge


Ashows

resultsusinginteractionvariable

betweenproxies

forintensive

monitoringofboardandchaeboldummy.

Panel

Breportsresultsusingaseparated

sample

based

on

whether

firm

sbelongto

thechaebolconglomerateornot.Chaebolisadummyvariable

that

takesavalueof1ifthefirm

belongs

tothechaebolconglomerate.Thedef-

initionsofvariablesaresameas

those

inTable

5.Thenumbersin

thesquarebracketsaret-statistics

computedbyrobust

standarderrorincorporatedat

thefirm

level.

***,

**,and*denote

significance

atthe1%

,5%

,and10%

level,respectively.

Panel


approach

IBMI1

IBMI2

IBMI3

IBMI4

Model

(1)

Model

(2)

Model

(3)

Model

(4)

Intercept

0.0097

[0.05]

0.2261

[1.03]

0.2292

[1.09]

0.1178

[0.53]

IBMI(A

)0.5213

[5.09]***

0.6256

[6.17]***

0.2221

[5.97]***

0.1587

[6.13]***

(A)*(B)

�0.4064[�

2.78]***

�0.4948[�

3.81]***

�0.1673[�

3.60]***

�0.1371[�

4.03]***

Chaebol(B)

0.1657

[4.63]***

0.1790

[4.95]***

0.1722

[5.01]***

0.1840

[5.04]***

Control

variables

Yes

Yes

Yes

Yes

Industry

effect

Yes

Yes

Yes

Yes

Yeareffect

Yes

Yes

Yes

Yes

n2968

2968

2968

2968

Adj-R2

0.202

0.207

0.207

0.206



Panel

B:Separated

sample

approach

IBMI1

IBMI2

IBMI3

IBMI4

Model

(1)

Model

(2)

Model

(3)

Model

(4)

Model

(5)

Model

(6)

Model

(7)

Model

(8)

Non-C

haebol

Chaebol

Non-C

haebol

Chaebol

Non-C

haebol

Chaebol

Non-C

haebol

Chaebol

Intercept

�0.3203

[�1.23]

0.9411

[2.64]***

�0.0492

[�0.19]

1.1503

[2.81]***

�0.0936

[�0.36]

1.1960

[3.16]***

�0.1248[�

0.47]

1.0119

[2.47]**

IBMI

0.5148

[5.07]***

0.2036

[1.81]*

0.6281

[6.18]***

0.2115

[2.02]**

0.2196

[5.88]***

0.0860

[2.62]***

0.1612

[6.19]***

0.0411

[1.45]

Control

variables

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Industry

effect

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yeareffect

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

n2281

687

2281

687

2281

687

2281

687

Adj-R2

0.211

0.209

0.217

0.210

0.217

0.214

0.216

0.230

Low

vs.

High

(t-statistics)

�2.13**

�3.08***

�3.02***

�3.22***

Tabel

11(C

ontinued)

H. S. Byun et al.


trol rights of controlling shareholders diminishes the influence of board monitoring

on firm value. This result is consistent with the finding that indicates a negative

relationship between wedge and firm value. Because controlling shareholders have

excessive power, they tend to pursue a private benefit of control and as a result,

agency costs increase. Therefore, to maximize shareholder value, not only specific

corporate governance but also comprehensive environmental factors should be con-

sidered.

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H. S. Byun et al.


Appendix I: Definition of Variables

Variable Definition

Tobin Q Proxy for firm value, computed by market value of assets

(market value of equity plus book value of debt) divided

by book value of assets

IBMII 1 Proxy for intensive board monitoring, calculated as the average of

the portion of outside directors belonging to each monitoring

committee (audit committee, outside director nominate committee,

and compensation committee) out of total outside directors

IBMI 2 Proxy for intensive board monitoring, computed by the average

composition ratio (outside directors divided by total directors) of

outside directors in each monitoring committee

IBMI 3 Proxy for intensive board monitoring, the summation of the

number of monitoring committees where an outside director is

in charge of the chairman

IBMI 4 Proxy for intensive board monitoring using Black and Kim (2011),

calculated by the summation of the number of monitoring

committees on the board

Direct Summation of ownership of controlling shareholders and their relatives

Direct dummy Dummy variable that takes a value of 1 if direct ownership of

controlling shareholders is over the median in the sample, 0 if otherwise

Wedge Control rights, which is the summation of direct ownership,

ownership of affiliates, and senior managers of the firm

minus cash flow rights of controlling shareholders (direct ownership)

Wedge dummy Dummy variable that takes a value of 1 if the wedge of

controlling shareholders is over the median in the sample, 0 if otherwise

Size Natural log of total assets

Leverage Total leverage divided by total assets

ROA Ratio of net income to total assets

Growth Summation of CAPEX and R&D expense divided by sales

Volatility Standard deviation of daily stock returns for the past year

Asset dummy Dummy variable that takes a value of 1 if the total asset is more

than 2 trillion won, 0 if otherwise

Chaebol Dummy variable that takes a value of 1 if the firm belongs to

a chaebol conglomerate, 0 if otherwise



Ownership Structure, Intensive Board Monitoring, and Firm Value: Evidence from Korea*

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