Does Sustainable Corporate Governance Enhance Accounting Practice? Evidence from the Korean Market

Daeheon Choi,Chune Young Chung,Paul Moon Sub Choi,Joung Hwa Choi

doi:10.3390/su12072585

Abstract

As corporate sustainability continues to improve and enhance the principles of good corporate governance, firms are exerting increasing efforts in terms of transparency and public disclosure. Transparency efforts provide information to the general public on the relationship between corporate governance and improved sustainability. The better informed shareholders are about the connection between corporate governance and sustainability, the more apparent the relationship will become over time. Prior studies assume that blockholders engage in active institutional monitoring by intervening directly in firms’ operations. In contrast, we argue that passive institutional monitoring is a more feasible governance mechanism in the Korean market owing to the market’s unique features (i.e., chaebols and pressure sensitivity). In particular, focusing on the blockholdings of the Korean National Pension Service (KNPS), we study the impact of passive monitoring on firms’ earnings quality, represented by earnings persistence, value relevance, and timeliness. The empirical evidence shows that KNPS blockholdings have a positive and significant impact on corporate earnings quality, indicating that passive blockholder monitoring is a more efficient channel for improving earnings quality in South Korea. Our results may be generalized to other emerging markets in which a few entities with concentrated economic power engender pressure-sensitive corporate landscapes for sustainability.

Highlights

A sound corporate governance environment is important for firms, and important for society
Unlike Kim et al [3] and Lel [5], who consider international settings, we focus solely on the Korean market to reflect its unique features, which pose a distinct challenge for institutional monitoring
We find that the three earnings attributes are significantly and positively correlated with KNPS_BIO, implying that a large fraction of reported earnings is likely to be sustained going forward for firms with high Korean National Pension Service (KNPS) blockholdings

Summary

Introduction

A sound corporate governance environment is important for firms, and important for society. Because the Korean financial market is dominated by chaebols, which have high information asymmetry, reported earnings are susceptible to managerial opportunism In this context, companies must implement efficient monitoring processes when they have substantial stakes in external entities. The individuals directly related to this matter are currently on trial This case illustrates that even Korea’s largest institutional blockholder, the KNPS, has not actively engaged in corporate governance in the interest of its beneficiaries given the pressure-sensitive investment context of the Korean market. Our findings are unique and differ from the finding in the US market that passive blockholders with high portfolio turnover rates are short term-focused and induce managerial myopia [12,13] We assume that this difference arises from Korea’s unique institutional context, in which shareholder activism is generally subdued.

Institutional Background and Related Literature

Other Related Studies

Sample and Key Variables

Results

Conclusions