The Effect of Corporate Governance on Financial Performance: Evidence from Korean Firms

This paper is to examine if there exists any systematic relationship between corporate governance and financial performance. Based on the argument that corporate governance would play the role of reducing the agency cost producing by the separation of ownership, this study hypothesized that corporate governance would improve the firms’ financial performance. Specifically, the firms with high corporate governance are predicted to have higher profitability and firm value than those with the firms of lower corporate governance. This study examined theses hypotheses, using a sample of 5,343 on Korean firms over nine-year period (2004-2012). An index published by Korean Corporate Governance Service (KCGS) was used as the measure of corporate governance performance. The results of this study find that the firms with high corporate governance performance exhibit better financial performance as measured by return on asset(ROA) and Tobin’s Q. These results are robust across different measures of variables and testing methodologies.