Corporate governance and price differences between dual-class shares in Korea

Abstract

This paper aims to explore the corporate governance determinants of price differences between voting and non-voting shares. It discusses the impact of corporate governance on voting premium and the role of outside blockholders by examining their interaction effect with the voting premium. We find that shareholder protection is positively related to the voting premium, in particular, after the enactment of the Financial Investment Services and Capital Markets Act and IFRS. We also find that foreign blockholders' ownership is positively related to the voting premium, whereas domestic blockholders’ ownership mitigates the impact of shareholder protection on the price differences. This study provides clues to diverse extant findings relative to the value of votes. Shareholder protection is a pivotal determinant of the value of voting rights in Korea, suggesting that voting rights remain valuable only when shareholders consider them valid enough to exercise their rights. It implies that when controlling shareholders dominate the entire business group, the value of votes is more likely to be under the impact of control contests.