The purpose of the study is to analyze the effects of ownership structure and corporate governance upon the firm value using the firm level data from the post-IMF crises in Korea.
 

This study uses 524 manufacturing firms listed in KOSPI during the period of 2001-2005. The data set is panel consisting of 2,620 cases. Date source of the study is the TS-2000 data base compiled by the Korea Listed Companies Association.
 
This study measures performance (firm value) through its accounting profitability for the following reasons. First, Korean stock market may not be fully efficient in the sense that stock prices are not likely to reflect all available information. Second, existing study using the stock market based measures such as Tobin-Q tends to fall into the trap of tautology. More specifically, they leads to the conclusion that the stock market suffers from Korea discount? by using under-valued Korean stock prices.

The ownership data provided by KLCA includes the names and shareholdings of the largest individual, family members,   affiliated firms and institutional shareholders. The study computes the ownership stake of owner (denoted by owner), owner including family (owner_total), affiliated firms (affil_share),  institution (relation_share), and foreigners(frgn_share).

A couple of accounting profitability measures are employed to assure robustness of the empirical analysis. They are operating income, ordinary income and net income divided by assets and denoted as ROA1, ROA2 and ROA3 respectively. The proxy variables for the governance structures are designed for the analysis. They are the influ_ratio and indi_ratio. The influ_ratio refers to the influence of the controlling shareholder in decision making. The influ-ratio is computed as the ratio of directors under the control of controlling shareholders to the   total number of directors in the board of directors. The indi_ratio is computed as the ratio of independent directors to the total number of directors.

The Korean economy can be characterized by the prevalence of business group that consist of legally independent firms. Controlling shareholders in business groups can maintain their control with the help of indirect pyramidal ownership and/or  interlocking ownership among affiliated firms. Many argue that when controlling shareholder's control rights exceed their ownership rights, they have an incentive to expropriate firm resources. This has been denoted as ?the private benefits of control. Firms experiencing greater expropriation of resources are likely expected to show lower performance.

The performances of large business groups were reported to be lower than the independent firms. Lower performances of large business groups contradicted Khanna and Palepu's argument that firms affiliated with large diversified business groups in emerging markets perform better than independent firms by reducing transaction costs through the intra-group internal markets. Based upon the above rationale, many have argued that Korea's poor corporate governance system of large business groups helped cause the 1997 crises. It has been named as the liability of large business groups for the IMF financial crises.

The implicit purpose of the study is to ascertain whether the hypothesis of inefficiency of large business groups derived from the notion of ?liability of large business groups for IMF crises? could be still applied after the era of IMF crises.

This study sets up the structural equations for the regression. The results of the study can be summarized as follows. First, the firm's profitability in terms of various ROA measures such as ROA1, ROA2, ROA3 is higher when the ownership of controlling shareholders is higher controlling for firm and industry specific effects. The relation between the ownership and the profitability could be characterized as the Inverse U shape. The value of ownership rights leading to the peak of profitability turns out to be around 50% (49~51%). The average of the ownership stakes of all firms during the period of 2001~2005 would be about 22%. Therefore, ?the hypothesis of the convergence of interests could be applied after the period of post-IMF crises. These result contrasts with Choi's study (2003) showing the validity of the ?hypothesis of entrenchment? during the IMF crises, 1996~2000.

Second, this study can not find any obvious empirical evidence that the firms with the disparity of ownership and control rights suffers from the low profitability. This implies that the tunneling of the controlling shareholders is not prevalent  after the period of IMF crises by virtue of autonomous regulating inertia of market forces. These result contrasts with Joh's study (2003) showing the negative effects of the discrepancies of ownership and control rights upon the profitability.

Third, this study finds the reliable positive effects of controlling shareholders' influences upon the profitability, and also reliable negative effects of independent directors ratio upon the profitability. It implies that the performance depends upon the speed of decision making and the entrepreneurship of the controlling shareholders. The sentiments for democratic management? turns out to be just invented illusion.