Park, Min Kyu
(2013)
Three essays on corporate governance in Korea.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis analyzes three topics regarding Korean firms’ corporate governance.
The first chapter examines whether organized employees play a role in limiting
executive compensation. Considering that employees’ voices and power are best
represented by labor unions and unionization rates, I conclude that labor union existence
and rates are both negatively associated with cash compensation. I also find that such
negative association is progressively stronger for upper percentile executive pay. I show
that the existence of labor unions has a strong negative correlation with stock option use
as well, but that the union rate does not. This implies that, if a firm has an organized
union, it may become more difficult for that firm to introduce a new payment method
such as an executive stock option.
The second chapter tests owner-managed firms’ demand for the Directors’ and officers’
liability insurance (D&O insurance). D&O insurance covers the litigation costs that have
to be paid by the directors and officers in case they are sued by other stakeholders.
Because D&O insurance premium is paid by the corporation (shareholders), not by
directors and officers, even though it primarily protects these people, the agency cost
related benefits that shareholders could draw from this insurance were frequently
discussed in previous studies. In this chapter, I hypothesize that, because such functions
of D&O insurance are less useful in case there are few interest conflicts, firms that rarely
suffer from agency issues should demand the insurance less. I focus on owner-manager
firms as examples of where there is little agency issue and test the hypothesis. I show
that both the probability of purchase and the size of insurance coverage are lower in
owner-managed firms. The price of insurance was also lower in owner-manager firms,
implying that owner-managership signals lower litigation risks.
The third chapter seeks to answer the fundamental question in insurance research: Does
corporate risk increase corporate insurance demand? I run a natural experiment using a
legislative change which increases litigation risk as an exogenous shock, and provide
empirical evidence that firms increase insurance demand when they are exposed to
increased risks. The Korean Government has decided to adopt shareholder class action
law for public firms with assets over a certain threshold. With shareholder class action,
even small shareholders can raise litigation against a board of directors, executives, or a
firm itself, so increasing the firm’s litigation risk. In a differences-in-differences model,
I find that the firms that are subject to the law increase the insurance demand
significantly more during the period than the firms that are free from class action law.
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