This dissertation empirically analyses the effects of corporate governance on economic value added (EVA) and executive compensation using the sample of Korean manufacturing firms listed on the Korea Exchange (KRX) from 2005 to 2012. Based on Coles et al. (2001), Gompers et al.(2003), Giroud and Mueller (2011), and Park et al. (2011), the second chapter studies the effects of corporate governance on EVA. The third chapter extends the studies of Core et al. (1999), Fahlenbrach (2009) and Giroud and Mueller (2011) by examining the effects of corporate governance on executive compensation. Major findings are as follows.
First, internal corporate governance, such as a board of directors, positively affects EVA. However, the interaction between internal corporate governance and labor union has statistically little, if any, impact on creating EVA. Besides, an interaction among internal corporate governance, product market competition, and labor union does not have a meaningful effect on EVA. These results show that internal corporate governance can be an effective mechanism to handle agency problems between shareholders and managers. The results also prove an English proverb “Too many cooks spoil the broth,” in that various control mechanism working altogether may put too much pressure on managers, resulting in poor performance.
Second, as expected, internal corporate governance negatively affects executive compensation, implying that a “good” corporate governance can prevent absurd compensation to top level executives. The two interactions from the second chapter have mixed results. While the first interaction has little impact on executive compensation, the second interaction turns out to have a positive impact on executive compensation. These results support the first hypothesis in the third chapter, find little support for the second hypothesis, and present an evidence against the third hypothesis. While internal corporate governance and product market competition work against executive compensation, labor union may be in the same boat with managers.
This dissertation differentiates itself from previous literature. Unlike most previous studies with one-dimensional approach, this study investigates interaction among various corporate governance mechanisms. Overall results have a few important economic and social implications. Because internal corporate governance works as an effective mechanism to mitigate agency problems in every model, policymakers should find ways to make internal control mechanisms, such as a board of directors, as independent as possible. As far as labor union is concerned, when other control mechanisms are not doing their jobs of handling agency problems, it needs to intervene in decisions made by top level executives.
There exists some caveats in this study, though. Its sample is somewhat outdated because information on labor union discounted in 2013. In addition, executive compensation data in this study is limited to only cash-based compensation, lacking information on performance-based compensation, such as stock options.