Two essays of empirical studies on corporate governance as determinant of stock price reaction

Abstract

Corporate governance is a broad concept including the board of director and corporate ownership that can affect a firm’s managerial decision-making. In this study, I analyze the effect of Korean corporate governance factor on firm value using the event study methodology. First, I examine the causal relation between the supermajority provision and firm value by employing a quasi-natural experiment: the two court rulings that weaken the anti-takeover force of the supermajority provision in Korea, where the supermajority provision is the most widely used anti-takeover provision. The existing research continues to debate whether firms' anti-takeover provisions enhance or harm firm value. On the one hand, such provisions may allow directors and management sufficient time to create long-term firm value. On the other hand, under such provisions, incumbents may become inefficient at the shareholders' expense. Using market reactions around the two court rulings, I find that firms with a supermajority provision as their only anti-takeover provision significantly underperform on average, compared with firms with no provision. Overall, the results indicate that the Korean stock market views such a provision as inducing higher firm value. Second, I examine convertible bond issue announcement effects in Korea where the number of convertible bond issues has been increasing rapidly. Convertible bond is a type of corporate bond, which is classified as a hybrid security since it can be converted into common stock under the conditions specified in indenture. I find that the average stock price reaction to a convertible bond issue announcement is significantly positive, which is contrast to the results in prior studies on seasoned equity offerings. In particular, I suggest that the key factors of convertible bond announcement effects in Korea are the stated use of proceeds as capital expenditure and the asymmetric information effect from investment opportunities.