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Prior work in emerging markets provides evidence that better corporate governance predicts higher market value, but very little on the specific channels through which governance increases value. We provide evidence, from a natural experiment in Korea, that reduced tunneling can be an important channel. Korean legal reform in 1999 improved board independence of “large” firms (assets > 2 trillion won), relative to smaller firms. This shock to governance allows us to assess the effects of reform using a regression discontinuity design. In event studies of the reform events, we show that large firms whose controllers have incentive to tunnel (positive Expropriation Risk Index firms) earn strong positive returns, relative to other large firms. In panel regressions over 1998-2004, we also show that better governance (higher Korea Corporate Governance Index) moderates the negative effect of related-party transactions on value and increases the sensitivity of firm profitability to industry profitability (consistent with less tunneling).