Corporate Governance and the Marginal Value of Cash in Korean Firms

The existing theories expect a lower marginal value of cash for weak governance firms. To test this hypothesis, we examine the relationship between corporate governance structures and marginal cash values in Korean firms. We estimate marginal cash values by using the model of Faulkender & Wang (2006). The firms listed in Korean Stock Exchange from 2005 to 2013 are analyzed. Corporate governance scores are supplied by Korean Corporate Governance Services. We show a higher marginal value of cash for the good governance firms measured by the total governance score. Our analysis on a detailed set of governance scores partially confirms this tendency. However, a lower marginal cash value is observed for the firms with a better quality of board structure, auditing, dividend policies. Our findings argue for the agency view of cash policy predicting a negative relationship between corporate governance scores and marginal cash values. A low marginal value of cash, widely observed in the sample firms, also supports severe resource diversion problem in Korean corporations.