The Moderating Role of Corporate Governance in the Relationship between Leverage and Firm Value: Evidence from the Korean Market

Ana Belén Tulcanaza-Prieto (), Younghwan Lee and Wendy Anzules-Falcones
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Ana Belén Tulcanaza-Prieto: Grupo de Investigación Lugar Medio Sociedad (LMS), Escuela de Negocios, Universidad de Las Américas (UDLA), Vía a Nayón, Quito 170124, Ecuador
Younghwan Lee: Department of Business Administration, Kumoh National Institute of Technology, Gumi 39177, Republic of Korea
Wendy Anzules-Falcones: Grupo de Investigación Lugar Medio Sociedad (LMS), Carrera de Administración de Empresas, Facultad de Ciencias Económicas y Administrativas, Universidad de Las Américas (UDLA), Vía a Nayón, Quito 170124, Ecuador

Risks, 2024, vol. 12, issue 1, 1-19

Abstract: This study examines the moderating function of corporate governance (CG) to the relationship between leverage and firm value (FV) using Korean market data. The study employs ordinary least-squares panel data regressions and two methods to manage endogeneity problems. The findings show a meaningful negative relationship between leverage and FV. This relationship, however, disappears, when the interaction variable of leverage × CG is included in the econometric model. These results indicate that an effective CG mechanism may lessen the probability of either the entrenched management-decision-making behavior or the agency costs of debt and, therefore, the negative effect of debt to FV diminishes. Moreover, our data show that the relationship between leverage and FV becomes positive, even though insignificant, for firms with a high level of CG, whereas it stays significantly negative for firms with a low level of CG. We also find that leverage for firms with a high level of CG is lower than those firms with a low level of CG. These additional findings support our conclusion of the moderating role of CG, which also influences the firms’ risk, leverage, and FV. The authors recommend the implementation of a robust CG plan to decrease the information asymmetry and the agency leverage problem.

Keywords: firm value; corporate governance; leverage; agency costs of debt; financial position (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2024
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