Does Corporate Governance Predict Firms' Market Values? Evidence from Korea

We report strong OLS and instrumental variable evidence that an overall cor-porate governance index is an important and likely causal factor in explaining the market value of Korean public companies. We construct a corporate gov-ernance index (KCGI, 0;100) for 515 Korean companies based on a 2001 Korea Stock Exchange survey. In OLS, a worst-to-best change in KCGI predicts a 0.47 increase in Tobin’s q (about a 160 % increase in share price). This effect is statistically strong (t 6.12) and robust to choice of market value variable (Tobin’s q, market/book, and market/sales), specification of the governance