Do credit rating concerns lead to better corporate governance? Evidence from Korea

• We use the Asian financial crisis to show that credit rating concerns affect corporate governance.
• This effect is concentrated in chaebol firms.
• Firms especially affected by the reforms demonstrate increased reliance on their credit ratings.

We study the 1997 Asian financial crisis to show that credit rating concerns affect firms' corporate governance. We treat the crisis as an exogenous shock that led to improvements in the informativeness of Korea's credit rating system, and we determine that credit rating concerns affect corporate governance following the crisis but not before the crisis. Moreover, this effect is concentrated in firms that are in chaebol business groups, consistent with their increased dependence on external financing. Finally, we find that firms that were particularly affected by the reforms demonstrate an increased reliance on debt that is dependent on credit ratings, consistent with our hypothesized effects of this exogenous shock. Our paper presents a novel approach to evaluating whether managers would improve their firms' corporate governance in response to their credit rating concerns, and it highlights the wide-ranging effects of reforms that are implemented due to financial crises.