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Debt, Maturity, and Corporate

Governance: Evidence from Korea
a
Hakkon Kim
a
Department of Finance, School of Economics and Management,
Southwest Jiaotong University, Chengdu, China
Published online: 30 Jun 2015.

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To cite this article: Hakkon Kim (2015) Debt, Maturity, and Corporate Governance: Evidence from
Korea, Emerging Markets Finance and Trade, 51:sup3, 3-19, DOI: 10.1080/1540496X.2015.1039898

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 Emerging Markets Finance & Trade, 51:S3–S19, 2015
Copyright © Taylor & Francis Group, LLC
ISSN: 1540-496X print/1558-0938 online
DOI: 10.1080/1540496X.2015.1039898

SYMPOSIUM ARTICLES
Debt, Maturity, and Corporate Governance: Evidence
from Korea
Hakkon Kim
Department of Finance, School of Economics and Management, Southwest Jiaotong University,
Chengdu, China

ABSTRACT: Using a unique survey data set, I examine how corporate governance practices of listed
Korean firms can affect debt ratio and debt maturity structure. I find that firms with poor governance
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tend to have a higher debt ratio (especially short-term debt ratio) than firms with good governance. I also
show that the documented relationships between corporate governance and debt ratio and between
corporate governance and debt maturity are not significantly different between chaebol (Korean business
group) and non-chaebol firms. These findings suggest that (short-term) debt financing can be used as a
monitoring tool to mitigate agency problems because financial intermediaries monitor the managers of the
borrowing firms. This study contributes to the corporate governance literature by providing evidence that
debt capital, especially short-term debt, can be used as a complementary monitoring tool for poorly
governed firms in an emerging economy.
KEY WORDS: corporate governance, debt capital, debt maturity structure, emerging market

In many emerging markets, severe market imperfections have created potential agency problems. When
information asymmetry is large, controlling shareholders can easily exploit minority shareholders for their
own agenda. In addition, the legal protection for investors in emerging markets is often ineffective, and
emerging market firms tend to employ pyramid or intercorporate ownership structures. These circumstances
enable the controlling shareholders (such as owner managers and their families) of the emerging market firms
to maintain control rights over firms significantly in excess of their cash flow rights (Harvey et al. 2004; La
Porta et al. 2002a; Lins and Servaes 2002). A rich discussion in the literature has concluded that debt finance
can be employed to prevent managers from engaging in inefficient projects and discourage the overinvest-
ment of free cash flow by self-serving managers (Hart and Moore 1995; Harvey et al. 2004; Jensen 1986,
1993; Stulz 1990; Zwiebel 1996). Grossman and Hart (1982), Jensen (1986), and Stulz (1990) argue that
firms can mitigate agency problems and managerial entrenchment by increasing the probability of bankruptcy
or takeover. Harvey et al. (2004) further show that the benefits of debt monitoring in emerging markets are
concentrated in firms with extreme managerial agency problems.
The debt maturity structure has also been recognized as playing an important role in reducing agency
costs. Myers (1977) and Stulz (2001) argue that the use of short-term debt can enable firms to mitigate
adverse selection and moral hazard problems because the debt allows financial intermediaries such as
banks to frequently monitor the firms. Similarly, Park (2000) demonstrates that the financial intermedi-
aries are likely to shorten the debt maturity to maximize their monitoring incentives. Despite the existing
literature largely documenting the monitoring role of debt in U.S. firms, little empirical evidence exists
on the relationship between debt financing and corporate governance in emerging market firms, which
generally suffer from the extreme managerial agency costs associated with pyramid ownership structures

Address correspondence to Hakkon Kim, Assistant Professor, Department of Finance, School of Economics
and Management, Southwest Jiaotong University, No. 111, Section 1, North Erhuan Road, Chengdu, Sichuan,
610031, China. E-mail: kimhk@home.swjtu.edu.cn
 S4 H. KIM

and ineffective legal investor protection (Harvey et al. 2004; La Porta et al. 1998). Hence, the managers
of firms in emerging economies may find it easier to derive their own personal benefits by exploiting
investors and establish their own empires than do the managers of U.S. firms.
Korea provides an excellent laboratory for testing the governance role of debt because managers
and family owners in the country routinely employ pyramid ownership structures, which give them
control rights that far exceed their proportional cash flow ownership. Furthermore, Korea has several
distinctive features compared to the United States. For example, Korean firms are highly dependent on
indirect financing, mostly in the form of bank loans, because of Korea’s bank-based financial system,
whereas the United States has a predominantly market-based system (see Goldsmith 1969; Hoshi et al.
1991; Levine 1997; Mork and Nakkamura 1999; Weinstein and Yafeh 1998; Wenger and Kaserer
1997). Thus, financial intermediaries (especially banks) play a relatively greater monitoring role in
Korea than in the United States (Bank of Korea 2011). Furthermore, the chaebol (Korean business
group) structure is also a unique characteristic of Korean firms, which allows firms to have pyramidal
ownership structures and managers to reinforce their controlling powers.
Using a unique and comprehensive data set on the corporate governance practices of listed Korean
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firms, this article shows that firms with poor governance are more likely to increase their ratio of total
debt to total assets. In contrast, firms with good governance mechanisms tend to have less incentive to
use debt financing. This article also finds that firms with poor governance tend to have a higher short-
term debt ratio than well-governed firms. One might argue that these relationships are due to firm size or
chaebol structure. However, the results are robust after controlling firm size and the documented
relationships between corporate governance and the ratio of total debt to total assets and between
corporate governance and the short-term debt ratio are not significantly different between chaebol and
non-chaebol firms. Thus, the findings suggest that debt financing (especially short-term debt) can be
employed to prevent the self-serving behavior of managers because the financial intermediaries monitor
managers of borrowing firms and enforce loan contracts in both chaebol and non-chaebol firms.
The main findings of this article contribute to the ongoing research on the monitoring role of debt.
First, although a large body of research has empirically examined the relationship between debt
financing and monitoring using U.S. data, there has been relatively less focus on the debt-monitoring
relationship in emerging countries. Thus, I examine how corporate governance practices can affect the
debt ratio and the debt maturity structure of firms using a unique survey data set on Korean firms.
Second, the argument of this article broadly follows the spirit of Jensen’s (1986) free cash flow
hypothesis, which states that indebted managers consume fewer perquisites because the interest on
debt reduces the amount of free cash flow available for self-serving managers and helps alleviate the
exploitation of corporate insiders.

Agency Problems, Monitoring, and (Short-Term) Debt

Managers can mitigate agency problems by voluntarily adopting monitoring or bonding mechanisms
(Jensen and Meckling 1976). Grossman and Hart (1982) argue that debt finance increases the
probability of bankruptcy and takeovers and motivates managers to decrease their consumption of
perquisites.1 Thus, debt reduces the agency costs of free cash flow by committing managers to pay
fixed interest and providing monitoring (Jensen 1986). Stulz (1990) also argues that managers who
have access to free cash flow have strong incentives to overinvest because their perks increase with the
level of investment, even if the firm invests in negative net present value (NPV) projects. However,
debt reduces the managers’ overinvestment incentives because it forces the managers to pay interest.2
The benefits of debt are greater when the expected agency costs are extremely high. Harvey et al.
(2004) argue that the benefits of debt monitoring are concentrated in firms with severe agency
problems and that shareholders value the compliance with monitored covenants when firms have
overinvestment problems. Therefore, debt payments constrain managers from investing in inefficient
projects and discourage the overinvestment of free cash flow by self-serving managers (Hart and
Moore 1995; Harvey et al. 2004; Jensen 1986, 1993; Stulz 1990; Zwiebel 1996). Financial
 DEBT, MATURITY, AND CORPORATE GOVERNANCE S5

intermediaries such as commercial banks also play an important role in mitigating the adverse
selection problems and moral hazards arising from the relationship between creditors and borrowers.
Diamond (1984) shows that financial intermediaries monitor the managers of borrowing firms and
enforce loan contracts because the banks are delegated the task of monitoring and make a promise to
give out returns to depositors. Boyd and Prescott (1986) and Cai et al. (1999) also argue that
financial intermediaries have easy access to inside information and have strong incentives to monitor
managers.
While extant studies examine empirically the association between debt (or financial intermediaries)
and monitoring using U.S. data, the debt-monitoring linkage in emerging countries is relatively less
examined. However, firms in many emerging countries usually suffer from misaligned managerial
incentives and the predominant pyramid or intercorporate ownership structures enable controlling
shareholders to maintain their control right in excess of cash flow rights (Harvey et al. 2004; Lins and
Servaes 2002). Thus, the managers of firms in emerging economies may find it easier to exploit
investors to derive their personal benefits and establish their own empires than do the managers of U.S.
firms. Korea is a typical emerging economy and has several distinctive features compared to the
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United States. For example, the Korean market has a bank-based financial system, whereas the United
States has a market-based system. Thus, Korean firms are highly dependent on indirect financing,
mostly in the form of bank loans, and the financial intermediaries (especially banks) play a relatively
larger role in Korean firms than in U.S. firms (Bank of Korea 2011).3 Furthermore, the chaebol
structure is a unique characteristic of Korean firms, which allows managers to reinforce their control-
ling power (La Porta et al. 1999).4 Thus, Korea provides an excellent laboratory in which to test the
monitoring role of debt.
Overall, previous studies show that debt reduces the agency costs of free cash flow and financial
intermediaries play an important role in mitigating adverse selection problems and moral hazards.
Thus, I expect that firms with bad governance will have a greater incentive to use debt financing to
alleviate agency problems than firms with good governance. However, the documented relationship
between debt and monitoring is likely to be stronger for Korean firms because the monitoring role of
debt and financial intermediaries tends to be more important in Korea than in the United States due to
the distinctive characteristics of the Korean market, such as the bank-based financial system and the
predominant pyramidal ownership structure.
Hypothesis 1: Poorly governed firms are likely to have a higher debt ratio than firms with good corporate
governance.
Datta et al. (2005) and Myers (1977) argue that financial intermediaries monitor, renegotiate, and
mitigate the adverse selection problems and moral hazards of firms with short-term debt more
frequently than those with long-term debt. Barclay and Smith (1995) also show that banks have a
strong bargaining position and monitor the managers of firms by reducing the term of debt because the
banks can exercise conditions for refunding with short-term debt (Rajan and Winton 1995; Stulz
2001). La Porta et al. (2002a), La Porta et al. (2003), and Stulz (2001) suggest that short-term debt can
be an effective tool for monitoring managers because its maturity comes up for frequent renewal.
Harvey et al. (2004) and Park (2000) demonstrate that banks are experts in gathering information
about firms and maximize their monitoring incentives by imposing restrictive covenants and shortened
debt maturity.5
Overall, prior research shows that the frequent renewal and renegotiation of short-term debt
improves the monitoring capability of financial intermediaries. Thus, I expect that poorly governed
firms will tend to have greater incentives to use short-term debt. However, excessive levels of short-
term debt can have adverse effects such as higher liquidity risk and bankruptcy costs. Hence, firms
with good governance have less incentive to use short-term debt. Taken together, I propose the
following hypothesis.
Hypothesis 2: Poorly governed firms tend to have a higher short-term debt ratio than well-governed firms.
 S6 H. KIM

Table 1. Summary statistics

Percentile

Variable N Mean Standard deviation 1st 25th 50th 75th 99th

a. Corporate Debt
Total Debt/Total Assets 4,952 0.440 0.197 0.048 0.294 0.447 0.582 0.877
Debt Maturity 4,292 0.312 0.342 0.000 0.004 0.178 0.531 1.000
b. Corporate Governance Index
CGI 4,952 34.576 10.102 4.667 28.330 34.000 39.330 65.670
Shareholder Rights 4,952 51.256 11.140 6.000 44.440 52.220 58.890 72.220
Board 4,952 21.225 11.729 2.000 13.750 20.000 25.560 60.000
Disclosure 4,952 30.375 15.177 2.000 20.000 27.140 38.330 78.330
Audit 4,952 35.934 20.802 2.220 20.000 34.000 48.000 90.000
CGI-Payout 4,952 33.760 9.997 4.667 27.670 33.000 38.330 64.670
c. Other Explanatory Variables
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Stock Return Volatility 4,942 0.200 0.071 0.080 0.149 0.187 0.239 0.428
Firm Size 4,952 12.748 1.526 9.987 11.645 12.457 13.588 17.008
Market to Book 4,952 1.017 0.492 0.379 0.720 0.887 1.146 3.326
ROA 4,952 0.024 0.141 -0.386 0.008 0.036 0.068 0.196
Credit Rating 4,942 5.082 1.888 2.000 4.000 5.000 6.000 10.000
R&D/Total Assets 4,952 0.005 0.011 0.000 0.000 0.000 0.005 0.062
Fixed Assets Ratio 4,952 0.570 0.180 0.170 0.440 0.572 0.698 0.981
Foreign Shareholder 4,704 0.114 0.154 0.000 0.006 0.043 0.168 0.660

Note: The data set comprises 4,952 firm-year observations covering the period 2003–2012.

Data and Methodology

Data Description
The unbalanced panel data used in this article comprise 4,952 firm-year observations for the 2003–
2012 period. The sample firms are Korean companies listed on the Korea Stock Exchange (KSE),
excluding firms in the financial services sectors. To test the hypotheses, I use the following three
databases: (1) the Korean Corporate Governance Service (KCGS), which provides a corporate
governance index (CGI); (2) TS2000, which offers financial statement information; and (3) the KIS-
Value Library, which offers credit-rating and foreign-ownership data.

Empirical Design
In this article, I investigate the relationships between the ratio of total debt to total assets and corporate
governance and between debt maturity and corporate governance. The basic regression equations are as
follows:

Total Debt=Total Assetsit ¼ β0 þ β1 CGIit

ðShareholder Rightsit ; Boardit ; Disclosureit ; Auditit ; CGI  Payoutit Þ þ β2 CGIit
ðShareholder Rightsit ; Boardit ; Disclosureit ; Auditit ; CGI  Payoutit Þ  Chaebol
þ β3 Chaebol þ β4 Stock Return Volatilityit þ β5 Firm Sizeit þ β6 Market to Bookit
þ β7 ROAit þ β8 Credit Ratingit þ β9 R&D=Total Assetsit þ β10 Fixed Assets Ratioit
þ β11 Foreign Shareholderit þ β12 Year Fixed Effects þ β13 Industry Fixed Effects þ eit
(1)
 DEBT, MATURITY, AND CORPORATE GOVERNANCE S7

Debt Maturityit ¼ β0 þ β1 CGIit

ðShareholder Rightsit ; Boardit ; Disclosureit ; Auditit ; CGI  Payoutit Þ þ β2 CGIit
ðShareholder Rightsit ; Boardit ; Disclosureit ; Auditit ; CGI  Payoutit Þ  Chaebol
þ β3 Chaebol þ β4 Stock Return Volatilityit þ β5 Firm Sizeit þ β6 Market to Bookit
þ β7 ROAit þ β8 Credit Ratingit þ β9 R&D=Total Assetsit þ β10 Fixed Assets Ratioit
þ β11 Foreign Shareholderit þ β12 Year Fixed Effects þ β13 Industry Fixed Effects þ eit
(2)

where Total Debt/Total Assets is the ratio of total debt to total assets. I also employ Debt Maturity as a
dependent variable defined as the ratio of the book value of long-term debt to the book value of total
debt following Barclay and Smith (1995). CGI is the corporate governance index, which consists of
shareholder rights, boards of directors, disclosure, audit, and payout indexes.6 For a robustness test, I
further use an equally weighted CGI (EW_CGI), which is defined as the equal weighting of the five
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sub-CGI indexes similar to Gompers et al. (2003). Chaebol is a dummy variable that equals one if the
firm is a member of the top-thirty business groups identified annually by the Korea Fair Trade
Commission, and zero otherwise.
Stock Return Volatility is the volatility of daily stock returns. Firm Size is defined as the natural
logarithm of total assets. Market to Book is the market value of total assets divided by the book value
of total assets. ROA is defined as net income divided by total assets. Credit Rating is a firm’s credit
rating from Korea Investors Service (KIS).7 R&D/Total Assets is the ratio of research and development
expenses to total assets. Fixed Assets Ratio is defined as fixed assets divided by total assets. Foreign
Shareholder is the percentage of share ownership by foreign shareholders for common stocks. Finally,
I control for year and industry fixed effects following Baek et al. (2004), Hwang et al. (2013), and Kim
et al. (forthcoming).
Table 1 presents the descriptive statistics of the variables used in empirical tests. I winsorize all of
the dependent and explanatory variables at the first and ninety-ninth percentage values. The mean
(median) ratio of total debt to total assets is 0.440 (0.447) and the mean (median) debt maturity is
0.312 (0.178). The mean of CGI is 34.576, and its standard deviation is 10.102.

Empirical Results
To investigate the relationships between the CGI and the ratio of total debt to total assets, and between
the CGI and debt maturity, I employ the following empirical analyses. I conduct univariate tests to
compare the mean and median values of total debt to total assets and debt maturity between well-
governed firms and poorly governed firms similar to Kim et al. (“Banking Market,” forthcoming). I
also regress total debt to total assets and debt maturity on the corporate governance index.
Furthermore, I use an interaction term between CGI and the chaebol dummy to examine whether
the CGI effect is stronger (or weaker) in chaebol firms than in non-chaebol firms.

Univariate Test
Panel A of Table 2 reports the differences in total debt to total assets and debt maturity according to the
value of the CGI score range. I split the sample into three groups according to the CGI score: below
33%, 33.01%–66%, and above 66.01% of CGI score. In Panel A, the mean (median) total debt to total
assets of each group is 0.448, 0.434, and 0.429 (0.451, 0.445, and 0.412), and the mean (median) debt
maturity (i.e., the ratio of long-term debt to total debt) of each group is 0.271, 0.342, and 0.651 (0.130,
0.229, and 0.801), respectively. Thus, the ratio of total debt to total assets and short-term debt both
decrease as the CGI increases.8 These results suggest that firms with good governance systems have a
low ratio of total debt to total assets, while firms with bad governance systems have a high ratio of
 S8 H. KIM

Table 2. Univariate test by distribution of total debt/total assets and debt maturity
CGI

Below 33.00 33.01–66.00 Above 66.01

Panel A
Total Debt/Total Assets
Mean 0.448 0.434 0.429
Median 0.451 0.445 0.412
Debt Maturity
Mean 0.271 0.342 0.651
Median 0.130 0.229 0.801

Low-CGI group High-CGI group Difference

Panel B
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Total Debt/Total Assets

Mean 0.447 0.433 0.014**
(t-value) (2.424)
Median 0.453 0.441 0.012**
(p-value) (0.013)
Debt Maturity
Mean 0.258 0.369 –0.111***
(t-value) (–10.766)
Median 0.112 0.256 –0.144***
(p-value) (0.000)

Note: Low-CGI group is in the bottom fiftieth percentile and high CGI group is in the top fiftieth percentile of CGI score.
I determine the statistical significance of the differences using the t-test and Wilcoxon rank-sum test (or Mann-Whitney
test). *Statistical significance at the 10 percent level; **statistical significance at the 5 percent level; ***statistical
significance at the 1 percent level.

total debt to total assets. These findings also show that firms with good governance systems have low
levels of short-term debt (i.e., high levels of long-term debt), and firms with bad governance systems
have high levels of short-term debt (i.e., low levels of long-term debt).
Panel B of Table 2 shows the mean and median differences in total debt to total assets and debt
maturity between well-governed firms and poorly governed firms. I split the sample into the two CGI
groups according to the median value of the CGI score, and the mean (median) differences are
evaluated by t-tests (Wilcoxon rank-sum tests).9 I find that the mean and median values of total
debt to total assets (0.433 and 0.441) of the high-CGI group are significantly lower than those (0.447
and 0.453) of the low-CGI group. Similarly, the mean and median values of debt maturity (0.369 and
0.256) of the high-CGI group are higher than those (0.258 and 0.112) of the low-CGI group, and the
differences are statistically significant at the 1 percent level. Overall, these results are supportive of the
hypotheses, which state that firms with bad governance systems tend to have a higher (short-term) debt
ratio than firms with good governance systems.

Multivariate Analysis
To verify the hypotheses, which posit a negative relationship between corporate governance and total
debt to total assets, and a positive (negative) relationship between corporate governance and debt
maturity (short-term debt ratio), I regress total debt to total assets and debt maturity on the CGI and its
subcategories. In addition, I use an interaction term between the CGI and the chaebol dummy to
examine the distinctive characteristics of the Korean market. Column 1 of Table 3 shows that the
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Table 3. The effects of corporate governance on total debt to total assets

Total Debt/Total Assets

(1) (2) (3) (4) (5) (6) (7)

CGI –0.084*** –0.067***

(–3.93) (–2.81)
CGI*Chaebol –0.051*
(–1.67)
Shareholder Rights –0.019
(–1.26)
Shareholder Rights*Chaebol –0.058**
(–1.98)
Board –0.018
(–0.76)
Board*Chaebol –0.036
(–1.39)
Disclosure –0.048***
(–3.25)
Disclosure*Chaebol 0.054**
(2.42)
Audit –0.002
(–0.19)
Audit*Chaebol –0.068***
(-4.71)
CGI-Payout –0.069***
(–2.88)
CGI-Payout*Chaebol –0.053*
(–1.72)
Chaebol 2.047 2.828* 0.999 -1.905** 3.151*** 2.076
(1.59) (1.83) (1.14) (–1.97) (3.71) (1.63)
Stock Return Volatility 0.062*** 0.065*** 0.066*** 0.068*** 0.062*** 0.068*** 0.066***
(2.65) (2.76) (2.81) (2.89) (2.61) (2.90) (2.79)
Firm Size 4.578*** 4.587*** 4.311*** 4.417*** 4.422*** 4.495*** 4.595***
(18.26) (17.73) (17.28) (17.04) (17.28) (17.59) (17.76)
Market to Book 0.042*** 0.042*** 0.042*** 0.041*** 0.041*** 0.042*** 0.042***

S9
(Continued )
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S10
Table 3. The effects of corporate governance on total debt to total assets (Continued)
Total Debt/Total Assets

(1) (2) (3) (4) (5) (6) (7)

(10.45) (10.48) (10.44) (10.36) (10.32) (10.48) (10.50)

ROA –0.106*** –0.107*** –0.105*** –0.105*** –0.104*** –0.107*** –0.107***
(–10.83) (–10.88) (–10.71) (–10.70) (–10.61) (–10.89) (–10.88)
Credit Rating 5.364*** 5.362*** 5.387*** 5.403*** 5.403*** 5.382*** 5.366***
(49.62) (49.59) (49.79) (50.07) (50.10) (50.03) (49.69)
R&D/Total Assets 0.068 0.068 0.021 0.029 0.062 0.047 0.07
(0.33) (0.33) (0.10) (0.14) (0.30) (0.23) (0.34)
Fixed Assets Ratio –0.165*** –0.166*** –0.165*** –0.165*** –0.165*** –0.165*** –0.166***
(–13.23) (–13.27) (–13.22) (–13.17) (–13.20) (–13.24) (–13.26)
Foreign Shareholder –0.068*** –0.070*** –0.067*** –0.069*** –0.065*** –0.075*** –0.070***
(–3.69) (–3.79) (–3.63) (–3.70) (–3.50) (-4.07) (–3.80)
Intercept Term Yes Yes Yes Yes Yes Yes Yes
Year Fixed Effects Yes Yes Yes Yes Yes Yes Yes
Industry Fixed Effects Yes Yes Yes Yes Yes Yes Yes
R-squared 0.438 0.438 0.436 0.436 0.437 0.440 0.439
Number of observations 4,704 4,704 4,704 4,704 4,704 4,704 4,704

Note: CGI is Korean corporate governance index over the period 2003–12. Chaebol dummy is 1 if member of top-thirty business groups identified annually by Korea Fair Trade
Commission; 0 otherwise. t-statistics are in parentheses. *Statistical significance at the 10 percent level; **statistical significance at the 5 percent level; ***statistical significance at
the 1 percent level.
 DEBT, MATURITY, AND CORPORATE GOVERNANCE S11

coefficient on the CGI is –0.084 and that it is statistically significant at the 1 percent level.10 Column 2
shows that the coefficient on the CGI is –0.067 (p < 0.01), and the coefficient on the interaction term
between the CGI and the chaebol dummy is –0.051 (p < 0.1).11 In terms of economic significance, a
one-standard-deviation decrease in the CGI leads to a 0.82 and 0.64 percentage point increase in the
ratio of total debt to total assets in columns 1 and 2 of Table 3, respectively.
These results suggest that poorly governed firms are likely to have a higher debt ratio than firms
with good corporate governance.12 It may be inferred from these results that debt can be used as a
complementary monitoring tool to corporate governance and that it mitigates agency problems by
decreasing free cash flow (Barclay and Smith 1995; Grossman and Hart 1982; Jensen 1986; Stulz
1990). In column 2 of Table 3, the interaction term between the CGI and the chaebol dummy is
negative, but the coefficient on the interaction term is weakly significant (p = 0.09).13 Overall, these
findings support the arguments in the literature that demonstrate the monitoring role of debt (Grossman
and Hart 1982; Jensen 1986; Stulz 1990).
The regression results from estimating Equation (2) are reported in Table 4. I use debt maturity as a
dependent variable instead of total debt to total assets. As shown in columns 1 and 2 of Table 4, the
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coefficients on the CGI are 0.016 (p < 0.01) and 0.014 (p < 0.01), respectively. In terms of economic

Table 4. The effects of corporate governance on debt maturity

Debt Maturity

(1) (2) (3) (4) (5) (6) (7)

CGI 0.016*** 0.014***

(3.85) (2.89)
CGI*Chaebol 0.007
(1.17)
Shareholder Rights 0.003
(0.88)
Shareholder 0.007
Rights*Chaebol (1.12)
Board 0.017***
(3.63)
Board*Chaebol 0.003
(0.55)
Disclosure 0.005*
(1.76)
Disclosure*Chaebol 0.002
(0.56)
Audit 0.002
(0.73)
Audit*Chaebol 0.008***
(2.61)
CGI-Payout 0.014***
(2.90)
CGI-Payout*Chaebol 0.007
(1.08)
Chaebol –0.119 –0.153 0.067 0.074 –0.195 –0.096
(–0.46) (–0.49) (0.38) (0.38) (–1.15) (–0.38)
Stock Return Volatility 0.002 0.001 0.001 0.001 0.001 0.001 0.001
(0.35) (0.27) (0.22) (0.11) (0.22) (0.16) (0.24)

(Continued )
 S12 H. KIM

Table 4. The effects of corporate governance on debt maturity (Continued)

Debt Maturity

(1) (2) (3) (4) (5) (6) (7)

Firm Size 0.282*** 0.260*** 0.314*** 0.249*** 0.286*** 0.286*** 0.260***

(6.85) (6.00) (7.63) (5.71) (6.71) (6.67) (6.01)
Market to Book 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** 0.002***
(2.90) (2.83) (2.89) (2.76) (2.92) (2.82) (2.81)
ROA –0.004 –0.004 –0.005* –0.004 –0.005* –0.004* –0.004
(–1.55) (–1.57) (–1.81) (–1.59) (–1.77) (–1.66) (–1.58)
Credit Rating –0.044** –0.044** –0.050** –0.054** –0.050** –0.051** –0.046**
(–2.04) (–2.04) (–2.29) (–2.48) (–2.31) (–2.35) (–2.11)
R&D/Total Assets –0.025 –0.025 –0.014 –0.019 –0.023 –0.02 –0.025
(–0.68) (–0.68) (–0.39) (–0.52) (–0.61) (–0.54) (–0.68)
Fixed Assets Ratio 0.008*** 0.008*** 0.008*** 0.007*** 0.008*** 0.007*** 0.008***
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(3.21) (3.25) (3.15) (3.09) (3.21) (3.10) (3.23)

Foreign Shareholder 0.010*** 0.010*** 0.010*** 0.010*** 0.010*** 0.011*** 0.010***
(2.76) (2.89) (2.80) (2.79) (2.76) (3.05) (2.88)
Intercept Term Yes Yes Yes Yes Yes Yes Yes
Year Fixed Effects Yes Yes Yes Yes Yes Yes Yes
Industry Fixed Effects Yes Yes Yes Yes Yes Yes Yes
R-squared 0.019 0.019 0.018 0.020 0.017 0.020 0.019
Number of observations 4,068 4,068 4,068 4,068 4,068 4,068 4,068

Note: Debt Maturity is a dependent variable and defined as ratio of book value of long-term debt to sum of book value of
long-term debt and book value of short-term debt. CGI is Korean corporate governance index over the period 2003–12.
Chaebol dummy is 1 if member of top-thirty business groups identified annually by Korea Fair Trade Commission; 0
otherwise. t-statistics are in parentheses. *Statistical significance at the 10 percent level; **statistical significance at the 5
percent level; ***statistical significance at the 1 percent level.

significance, a one-standard-deviation decrease in the CGI leads to 0.16 and 0.14 percentage point
increases in debt maturity in columns 1 and 2 of Table 4, respectively. These findings provide evidence
that poorly governed firms tend to have a higher short-term debt ratio than well-governed firms.14
Barclay and Smith (1995), La Porta et al. (2002a), La Porta et al. (2003), Myers (1977), and Stulz
(2001) all argue that short-term debt can provide an effective means for monitoring managers because
it enables the financial intermediaries to mitigate adverse selection and moral hazard problems due to
the frequent contract renegotiations. Thus, these results suggest that firms with bad governance
systems are more likely to use short-term debt, which can be used as a monitoring tool for self-
serving managers. In columns 4, 5, and 7 of Table 4, the coefficients on the sub-CGI indexes for
board, disclosure, and CGI-payout are positively significant, but most of the coefficients on the
interaction terms are insignificant. These results show that the documented effects of the CGI on
debt maturity are not distinctly different between the chaebol and non-chaebol firms.15

Robustness Tests
Firm Clustering and the Fixed-Effects Model
To explore whether the core evidence is robust, I further cluster the standard errors by firm in Table 5
following Jo et al. (forthcoming). In columns 1–4, I regress total debt to total assets and debt maturity
on the CGI and its interaction term (CGI*chaebol) with robust standard errors clustered at the firm
level. Consistent with the aforementioned findings, these results indicate that poorly governed firms
 DEBT, MATURITY, AND CORPORATE GOVERNANCE S13

Table 5. Robustness tests: Firm clustering

Total Debt/Total Assets Debt Maturity Total Debt/Total Assets Debt Maturity

(1) (2) (3) (4) (5) (6) (7) (8)

CGI –0.084*** –0.067** 0.016*** 0.014** –0.081** –0.075** 0.011* 0.012*

(–2.63) (–2.12) (2.77) (2.19) (–2.38) (–2.22) (1.75) (1.84)
CGI*Chaebol –0.051 0.007 –0.014 –0.001
(–1.37) (0.66) (–0.95) (–0.28)
Chaebol 2.047 –0.119
(1.30) (–0.28)
Stock Return Volatility 0.062** 0.065** 0.002 0.001 0.057* 0.057* 0.001 0.001
(2.14) (2.22) (0.40) (0.31) (1.85) (1.86) (0.24) (0.25)
Firm Size 4.578*** 4.587*** 0.282*** 0.260*** 7.046*** 7.075*** 0.083 0.085
(10.32) (10.03) (5.54) (4.70) (6.17) (6.18) (0.50) (0.51)
Market to Book 0.042*** 0.042*** 0.002** 0.002** 0.040*** 0.040*** 0.001 0.001
(4.82) (4.82) (2.37) (2.31) (4.27) (4.28) (1.09) (1.09)
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ROA –0.106** –0.107** –0.004* –0.004** –0.123*** –0.123*** 0.002 0.002

(–2.26) (–2.28) (–1.91) (–2.00) (–2.59) (–2.60) (0.49) (0.49)
Credit Rating 5.364*** 5.362*** –0.044* –0.044* 4.576*** 4.574*** –0.041 –0.041
(27.15) (27.18) (–1.76) (–1.77) (20.88) (20.87) (–1.17) (–1.18)
R&D/Total Assets 0.068 0.068 –0.025 –0.025 0.371 0.372 –0.111 –0.111
(0.24) (0.24) (–0.57) (–0.56) (0.98) (0.98) (–1.41) (–1.41)
Fixed Assets Ratio –0.165*** –0.166*** 0.008** 0.008** –0.177*** –0.177*** 0.007 0.007
(–5.88) (–5.89) (2.29) (2.31) (–5.31) (–5.31) (1.57) (1.56)
Foreign Shareholder –0.068** –0.070** 0.010* 0.010** –0.02 –0.021 0.016* 0.015*
(–2.47) (–2.54) (1.89) (2.04) (–0.63) (–0.66) (1.72) (1.72)
Intercept Term Yes Yes Yes Yes Yes Yes Yes Yes
Year Fixed Effects Yes Yes Yes Yes Yes Yes Yes Yes
Industry Fixed Effects Yes Yes Yes Yes No No No No
Firm Fixed Effects No No No No Yes Yes Yes Yes
Firm Clustering Yes Yes Yes Yes Yes Yes Yes Yes
R-squared 0.438 0.438 0.019 0.019 0.447 0.447 0.023 0.024
Number of 4,704 4,704 4,068 4,068 4,704 4,704 4,068 4,068
observations

Note: Total Debt/Total Assets is defined as ratio total debt to total asset. Debt Maturity is defined as ratio of book value
of long-term debt to sum of book value of long-term debt and book value of short-term debt. CGI is Korean corporate
governance index over the period 2003–12. Chaebol dummy is 1 if member of top-thirty business groups identified
annually by Korea Fair Trade Commission; 0 otherwise. t-statistics are in parentheses. *Statistical significance at the
10 percent level; **statistical significance at the 5 percent level; ***statistical significance at the 1 percent level.

are likely to have a higher debt ratio than well-governed firms. I also find that poorly governed firms
tend to have a higher short-term debt ratio than well-governed firms.
In columns 5–8, I further control for firm fixed effects instead of industry fixed effects with robust
standard errors clustered at the firm level.16 In the previous regression, I did not control for firm fixed
effects because the chaebol dummy is highly correlated with firm fixed effects (Baek et al. 2004;
Hwang et al. 2013). To resolve the serious multicollinearity problem, I temporarily remove the chaebol
dummy in columns 5–8 of Table 5. These results consistently indicate that poorly governed firms are
more likely to increase their ratio of total debt to total assets and have more incentive to use short-term
debt than well-governed firms. However, I find that all of the coefficients on the interaction terms
(CGI*chaebol) are insignificant in Table 5. Thus, these robustness tests show that there are no
 S14 H. KIM

significant differences in the document effects of CGI on total debt to total assets and debt maturity
between chaebol and non-chaebol firms.17

Pooled OLS, Random Effects, and Fama-MacBeth Approaches

In Table 6, I employ three alternative methods—pooled ordinary least squares (OLS), random effects, and
Fama-MacBeth—to test whether the hypotheses are robust. Columns 1–4 of Table 6 present the pooled
OLS results. Consistent with earlier empirical regression results, I find a significantly negative association
between the CGI and total debt to total assets and a significantly positive association between the CGI and
debt maturity. Columns 5–12 of Table 6 present the results of the random-effects and Fama-MacBeth
approaches. The results consistently indicate that firms with bad governance systems are likely to have a
higher (short-term) debt ratio than firms with good corporate governance. Overall, these findings support
the predictions about the relationships between the CGI and total debt to total assets, and the CGI and debt
maturity.18 In Columns 2, 4, and 6 of Table 6, the coefficients on the interaction terms between the CGI
and the chaebol dummy are shown to be statistically significant at the 10 percent level, while in columns
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8, 10, and 12, the coefficients are insignificant. Thus, I cannot argue that the documented relationships
between corporate governance and debt ratio, and between corporate governance and debt maturity, are
significantly different between chaebol and non-chaebol firms.

Simultaneous Equations Model

Total debt to total assets and debt maturity can be substituted and determined simultaneously (e.g.,
Barclay et al. 2003; Johnson 2003). In addition, corporate governance and debt financing policies,
such as total debt to total assets and debt maturity, can be jointly determined. These potential
endogeneity problems may explain the causal relationship between the CGI and total debt to total
assets, and between the CGI and debt maturity. To mitigate these endogeneity problems, I estimate a
system of equations using a three-stage-least-square (3SLS) approach following Harvey et al. (2004)
and Jo and Na (2012) in Table 7.19 In columns 1 and 3 of Table 7, I add debt maturity to Equation (1),
and in columns 2 and 4, I include total debt to total assets in Equation (2) and estimate both equations
as a system. Following Jo and Na (2012), in the simultaneous equations model (SEM) Equation (1), I
use the same set of firm characteristics as in the previous regressions, and the SEM Equation (2) is
modeled as a function of industry dummies and a similar set of firm characteristics that include all of
the variables except ROA.20 As Table 7 shows, the results from the SEMs show a significantly
negative association between the CGI and total debt to total assets and a significantly positive
association between the CGI and debt maturity. These results are consistent with those of the earlier
regressions.

Conclusion
Emerging market firms tend to employ pyramid or intercorporate ownership structures in which most
of the decisions are made by the management group. These structures enable the managers and their
families to maintain control rights over their firms significantly in excess of their cash flow rights. I
examine the relationships between corporate governance and debt financing, and between corporate
governance and debt maturity. In this analysis, I consider the distinctive features of Korean firms, such
as the high dependence on bank loans and the predominant chaebol structure.
I find that firms with poor governance are more likely to increase their total debt to total assets.
These empirical results further show that poorly governed firms tend to have a higher short-term debt
ratio than well-governed firms. However, the documented relationships between corporate governance
and total debt to total assets and between corporate governance and the short-term debt ratio are not
significantly different between the chaebol and non-chaebol firms. The findings of this article indicate
that debt capital and short-term debt can be used as complementary monitoring tools for mitigating the
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Table 6. Robustness tests: Pooled OLS and random effects, Fama-MacBeth

Pooled OLS Random effects Fama-MacBeth

Total Debt/Total Assets Debt Maturity Total Debt/Total Assets Debt Maturity Total Debt/Total Assets Debt Maturity

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

CGI –0.073*** –0.054** 0.015*** 0.018*** –0.089*** –0.071*** 0.251** 0.257** –0.059** –0.058* 0.246* 0.361***
(–3.53) (–2.29) (4.48) (4.65) (–4.15) (–2.97) (2.57) (2.35) (–2.85) (–2.05) (2.01) (5.04)
CGI*Chaebol –0.073* –0.011* –0.054* –0.044 –0.016 –0.427
(–1.78) (–1.76) (–1.78) (–0.30) (–0.40) (–1.36)
Chaebol 5.881*** 0.919*** 2.229* 6.164 3.348* 22.544
(3.50) (3.47) (1.73) (1.01) (2.20) (1.52)
Stock Return Volatility –0.002 –0.001 –0.002 –0.002 0.066*** 0.069*** 0.035 0.033 –0.017 –0.019 0.043 0.069
(–0.09) (–0.05) (–0.34) (–0.36) (2.79) (2.91) (0.31) (0.29) (–1.35) (–1.53) (0.64) (0.82)
Firm Size 3.512*** 3.070*** 0.336*** 0.262*** 4.763*** 4.763*** 0.618 –0.059 3.527*** 3.157*** 1.021* 0.07
(21.53) (16.87) (12.87) (8.93) (18.74) (18.20) (0.84) (–0.07) (33.87) (21.94) (1.90) (0.16)
Market to Book 0.046*** 0.044*** 0.003*** 0.003*** 0.040*** 0.040*** –0.005 –0.008 0.059*** 0.057*** 0.013 0.009
(11.99) (11.31) (4.84) (4.28) (10.16) (10.18) (–0.28) (–0.45) (6.30) (6.45) (0.48) (0.34)
ROA –0.016 –0.014 –0.015*** –0.014*** –0.109*** –0.110*** 0.037 0.038 0.015 0.017 –0.186** –0.154***
(–1.18) (–0.99) (–5.40) (–5.24) (–11.14) (–11.17) (0.59) (0.61) (0.51) (0.60) (–3.09) (–3.34)
Credit Rating 7.749*** 7.753*** –0.071*** –0.071*** 5.321*** 5.321*** –0.187 –0.201 7.850*** 7.848*** –0.891 –0.897
(68.39) (68.66) (–3.74) (–3.72) (48.98) (48.97) (–0.40) (–0.43) (62.38) (68.77) (–1.31) (–1.34)
R&D/Total Assets –0.336** –0.303* –0.019 –0.015 0.002 0.002 –0.459 –0.433 –0.472*** –0.431** 0.249 0.23
(–2.15) (–1.94) (–0.74) (–0.60) (0.01) (0.01) (–0.66) (–0.62) (–3.28) (–3.20) (0.39) (0.38)
Fixed Assets Ratio –0.171*** –0.172*** 0.009*** 0.009*** –0.181*** –0.182*** 0.054 0.052 –0.168*** –0.169*** 0.059 0.058
(–16.68) (–16.82) (5.68) (5.51) (–14.73) (–14.78) (1.21) (1.17) (–8.03) (–8.55) (1.13) (1.09)
Foreign Shareholder –0.057*** –0.053*** 0.013*** 0.013*** –0.076*** –0.079*** 0.149** 0.158** –0.086*** –0.081*** 0.156 0.167
(–4.12) (–3.84) (5.13) (5.45) (–4.07) (–4.18) (2.24) (2.37) (–9.09) (–8.61) (1.28) (1.30)
Intercept Term Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year Fixed Effects Yes Yes Yes Yes Yes Yes Yes Yes No No No No
Industry Fixed Effects Yes Yes Yes Yes Yes Yes Yes Yes No No No No
R-squared 0.641 0.643 0.178 0.185 0.684 0.684 0.019 0.026 0.662 0.665 0.063 0.088
Number of observations 4,704 4,704 4,068 4,068 4,704 4,704 4,068 4,068 4,704 4,704 4,068 4,068

Note: Total Debt/Total Assets is defined as the ratio of total debt to total assets. Debt Maturity is defined as ratio of book value of long-term debt to sum of book value of long-term debt and
book value of short-term debt. CGI is Korean corporate governance index over the period 2003–12. Chaebol dummy is 1 if member of top-thirty business groups identified annually by
Korea Fair Trade Commission; 0 otherwise. t-statistics are in parentheses. *Statistical significance at the 10 percent level; **statistical significance at the 5 percent level; ***statistical
significance at the 1 percent level.

S15
 S16 H. KIM

Table 7. Robustness tests: System of equation estimation

Three-stage least squares estimators (3SLS)

Total Debt/Total Assets Debt Maturity Total Debt/Total Assets Debt Maturity

(1) (2) (3) (4)

Debt Maturity 2.188*** 1.899***

(3.41) (2.93)
Total Debt/Total Assets 0.172** 0.174**
(2.14) (2.12)
CGI –0.101*** 0.038*** –0.086** 0.038***
(–2.86) (5.43) (–2.19) (4.81)
CGI*Chaebol –0.023 –0.001
(–0.53) (–0.03)
Chaebol 1.965 0.034
(1.06) (0.07)
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Stock Return Volatility –0.029 0.008 –0.027 0.008

(–0.86) (0.92) (–0.83) (0.93)
Firm Size 2.737*** –0.324 2.656*** –0.332
(10.29) (–1.36) (10.30) (–1.46)
Market to Book 0.054*** –0.007 0.054*** –0.007
(10.69) (–1.42) (10.85) (–1.43)
ROA –0.043** –0.046**
(–2.10) (–2.27)
Credit Rating 7.361*** –1.308** 7.343*** –1.320**
(54.99) (–2.18) (55.31) (–2.16)
R&D/Total Assets –0.252 0.053 –0.252 0.053
(–1.46) (1.21) (–1.48) (1.20)
Fixed Assets Ratio –0.181*** 0.041*** –0.179*** 0.041***
(–14.24) (4.37) (–14.23) (4.29)
Foreign Shareholder –0.100** 0.023*** –0.094*** 0.023***
(–5.61) (3.65) (–5.29) (3.72)
Intercept Term Yes Yes Yes Yes
Year Fixed Effects Yes Yes Yes Yes
Industry Fixed Effects No Yes No Yes
R-squared 0.599 — 0.607 —
Number of observations 4,068 4,068 4,068 4,068

Note: Total Debt/Total Assets is defined as the ratio of total debt to total assets. Debt Maturity is defined as ratio
of book value of long-term debt to sum of book value of long-term debt and book value of short-term debt. CGI is
Korean corporate governance index over the period 2003–12. Chaebol dummy is 1 if member of top-thirty business
groups identified annually by Korea Fair Trade Commission; 0 otherwise. t-statistics are in parentheses. *Statistical
significance at the 10 percent level; **statistical significance at the 5 percent level; ***statistical significance at the
1 percent level.

agency problems of poorly governed firms. However, the excessive use of debt (or short-term debt) is
likely to aggravate firms’ liquidity risk and bankruptcy costs. Thus, well-governed firms may have less
incentive to use debt capital and short-term debt than poorly governed firms. The findings broadly
support the existing arguments on the monitoring role of debt financing, such as Jensen’s (1986) free
cash flow hypothesis.
Although numerous extant studies have examined the relationship between debt financing and
monitoring using U.S. data, little empirical research has investigated the debt-monitoring link in
emerging countries. Korea provides an excellent laboratory for testing the governance role of debt
 DEBT, MATURITY, AND CORPORATE GOVERNANCE S17

because of the predominant pyramid ownership structure, which enables the controlling managers and
their families to easily exploit investors to derive personal benefits and establish their own empires. By
using a unique survey data set of Korean firms, this analysis contributes to the corporate governance
literature by filling the research gap on emerging markets.

Notes
1. Tang and Wang (2011) show that corporate governance has a positive effect on firm liquidity in Chinese
firms.
2. Jiraporn and Gleason (2007) find an inverse relationship between leverage and shareholder rights. They
argue that firms with poor shareholder rights carry more debt, which mitigates agency problems.
3. Although Harvey et al. (2004) argue that in emerging markets, family groups typically control the banks and can
use them for their own purposes, in Korea, banking and commerce have been separated by the Korean Banking Act.
4. Gonenc et al. (2007) argue that business groups usually have internal capital markets which play an
important role for their existence, especially in an emerging market.
5. Zheng et al. (2012) argue that firms located in countries with high uncertainty avoidance, high collectivism,
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a high power distance, and high masculinity tend to use more short-term debt. Harford et al. (2008) investigate the
relationship between boards and firms’ leverage decisions. They argue that firms with strong boards tend to have a
high short-term debt ratio. Shyu and Lee (2009) further find a negative association between excess control rights
and short-term debt in family controlled firms. Bektas and Kaymak (2009) find positive relationships between the
age, size, and asset tangibility of firm and bank-debt ratio.
6. I also use the subindexes of the CGI as an independent variable. CGI-Payout is defined as the corporate
governance index without a payout score.
7. The Korea Investors Service (KIS) rates the credit rating of firms on a scale of one to ten, with one
indicating “extremely strong” and ten indicating “extremely vulnerable.”
8. In Panel A of Table 2, the mean (median) differences of total debt to total assets among three groups are
statistically significant at the 5 percent or 10 percent level. The mean (median) differences of debt maturity among
three groups are statistically significant at the 1 percent level.
9. Low-CGI group is in the bottom fiftieth percentile, and high-CGI group is in the top fiftieth percentile, of
CGI score.
10. In a multivariable analysis, I use the percentage of total debt to total assets and debt maturity because the
coefficients of CGI and its interaction with the chaebol dummy are too small.
11. It is widely documented that the market-to-book ratio is negatively related to total debt to total assets
(Baker and Wurgler 2002; Hovakimian et al. 2004). However, Chen and Zhao (2006) show that the empirical
basis of this debate—that is, the negative relationship between the market-to-book and leverage ratios—is not
robust. They argue that firms with high market-to-book ratios tend to have a high degree of leverage because firms
with higher market-to-book ratios are likely to face lower borrowing costs. Grossman and Hart (1982) argue that
financial leverage can be negatively associated with the fixed-asset ratio. They find that firms with a low fixed-
asset ratio (or a low level of collateral value) tend to have serious agency problems due to information asymmetry.
Thus, firms with a low fixed-asset ratio have more incentives to increase their leverage because the financial
intermediaries play a role in mitigating the agency problems. Using a Korean sample, Lee and Lee (1999) also
find a strong and negative relationship between financial leverage and the fixed-asset ratio. They argue that firms
with a high fixed-asset ratio are likely to have greater fixed (operating) costs than variable (operating) costs and
that this is likely to increase their operating risk and bankruptcy risk. Thus, they argue that firms with a high fixed-
asset ratio tend to have low levels of financial leverage due to the high levels of operating risk and bankruptcy
risk.
12. In untabulated results, I further control for the tax rate, which could affect the dependent variable (i.e., total
debt/total assets). In addition, I use the volatility of operating income (before interest deductions) over total assets
and operating income (before interest deductions) to total assets instead of stock return volatility and ROA, which
can be endogenously determined. These results are consistent with the view that poorly governed firms are more
likely to increase their ratio of total debt to total assets than are well-governed firms.
13. In Model 5 of Table 3, the coefficient on disclosure is −0.048 (p < 0.01), but the interaction term between
disclosure and the chaebol dummy is 0.054 (p < 0.05). These results show that chaebol firms with higher
disclosure scores tend to have a higher ratio of total debt to total assets. I believe that firm disclosure is related
to the cost of debt.
14. For another robustness test, I control for asset maturity, which can affect debt maturity. I also use the
volatility of operating income (before interest deductions) over total assets and operating income (before interest
deductions) to total assets instead of stock return volatility and ROA. I control for the asset maturity, the volatility
of operating income (before interest deductions) over total assets, and operating income (before interest
 S18 H. KIM

deductions) to total assets, together. These results show that there is a significant and positive relationship between
the CGI and debt maturity.
15. I think that although, due to lower cost of (short-term) debt financing, chaebol firms possess greater (short-
term) debt capacity than non-chaebol firms (Ferris et al. 2003; Gul and Kealey 1999), chaebol firms may have less
or indifferent incentive to use (short-term) debt because they have better corporate governance than non-chaebol
firms. The untabulated results show that mean and median values of CGI for chaebol firms are significantly higher
than those of CGI for non-chaebol firms.
16. The Hausman specification test gives a χ2 of 334.07 (p = 0.000) when total debt to total assets is used as a
dependent variable. In addition, when I use debt maturity as a dependent variable, the test gives a χ2 of 71.18 (p = 0.000).
17. These results suggest that the effect of the CGI on the total debt to total assets of chaebol firms shown in
column 2 of Table 3 may be weak and vulnerable.
18. In untabulated results, I use an equal-weighted corporate governance index (EW_CGI) which is the equal
weighing of the sub-CGI indexes similar to Gompers et al. (2003). The results show that the negative association
between the CGI and total debt to total assets and the positive association between the CGI and debt maturity
remain intact when I use the EW_CGI instead of the (unequal-weighted) CGI.
19. I also conduct a dynamic system generalized method of moments (GMM) approach to mitigate endogene-
ity problems. These results for the dynamic system GMM consistently show that firms with bad governance
systems tend to increase their total debt to total assets and have more incentives to use short-term debt than firms
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with good governance systems.

20. I thank a reviewer for suggesting these insightful approaches to address endogeneity problem.

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