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

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.