Corporate Governance Structure and Debt Levels: Using Korean Firms

다국어 초록 (Multilingual Abstract)

Since Asian Financial Crisis in 1997, the idea of corporate governance structure has been an important matter in Korea. Having a good governance structure can reduce agency costs and increase firm value. In this paper, we investigate the influence of corporate governance structure on firms’ debt ratios, using three different governance proxies, the portion of stocks held by the largest shareholders and their family members (PLS), the portion of an outside director over total board member (POD), and the portions of stocks held by foreigner (PFO). This paper includes capital structure adjustment behaviours as well as the relationship between debt level and governance structure, in line with three different governance structure proxies. In addition, as there is a high probability of existing endogeneity problem in our residual as using panel data, we avoid to use an OLS estimator but use estimators that require instrument variables.
We find that PLS and POD do not show a clear association with debt levels, and many of the coefficients of them are not statistically significant. However, PFO shows a clear negative association with debt levels over estimators. We also find that high levels of governance proxies cause firms to adjust their debt levels faster: That is to say that, when the largest shareholders, independent directors or foreign investors have enough power to influence a firms’ debt level decision procedure, they do use this power. Particularly, we also find that high level of PLS has the strongest effect upon firms’ debt level shifts. With this result, we suggest the importance of strong managerial-ownership. Therefore, our results suggest that PFO has the clearest negative relationship with debt levels: and high level of PLS has the strongest impact on firms’ debt level adjustment decisions. Above all, our results suggest that although PLS and POD do not show us a clear association with debt levels, they all have influence on firms’ debt level decision policies in some way. Last, but not least, we likewise find that there are stronger relationships between debt level and controlled variables than the relationship between debt level and corporate governance proxies, across our models. This implies that although corporate governance is important and takes some roles when firms decide their debt levels, it is less important compared with firms’ other capital structure determinants.

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