Institutional Monitoring and the Korea Discount: Evidence from the National Pension Service and the Stewardship Code

Abstract

This paper examines whether the National Pension Service’s (NPS) November 2018 adoption of Korea’s Stewardship Code narrowed the Korea Discount, the persistent undervaluation of Korean equities relative to international peers. Using a firm-year panel of listed firms across 41 countries from 2012 to 2023, I exploit the NPS’s stewardship adoption as a discrete policy event and estimate a continuous-treatment two-way fixed-effects difference-in-differences model, with treatment intensity measured by each Korean firm’s pre-treatment NPS ownership share. I evaluate effects on raw valuation multiples, a set of governance-relevant outcomes, and a firm-year Korea Discount measure I construct by adapting the "warranted-multiple" approach of Bhojraj and Lee (2002). I find that firms with greater pre-treatment NPS ownership experienced a relative decline in price-to-earnings and price-to-cash-flow multiples after adoption, and that the firm-level Korea Discount widened for NPS-owned firms. Tests of the governance channels produce limited evidence of the behavioral shifts theorized to come from improved stewardship, and a binned robustness specification shows that the elect does not scale uniformly with the size of the NPS’s ownership stake. These results suggest that institutional monitoring by the NPS did not deliver the valuation gains envisioned by Korea’s governance reform agenda, providing insights for both Korean policymakers and investors.