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How Does Corporate Governance Risk at Home Affect Investment Choices Abroad?

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Author Info
Woochan Kim
Taeyoon Sung
Shang-Jin Wei

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Abstract

Disparity between control and ownership rights gives rise to the risk of tunneling by the controlling shareholder. This disparity is prevalent in many emerging market economies and present in some developed countries. This paper studies whether and how the degree of control-ownership disparity in investors' home countries affects their portfolio choice in an emerging market. It combines two unique data sets on ownership and control in business groups, and investor-stock level foreign investment in Korea. A key finding is that, investors from low-disparity countries disfavor high-disparity stocks in Korea, but investors from high-disparity countries are indifferent. Moreover, investors from low-disparity countries became averse to disparity only after the Asian financial crisis. These results suggest that the nature of corporate governance in international investors' home countries affects their portfolio choice abroad, and therefore that these investors should not be lumped together in analyses of their portfolio choice.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13721.

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Date of creation: Jan 2008
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Handle: RePEc:nbr:nberwo:13721

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Find related papers by JEL classification:
F3 - International Economics - - International Finance
G1 - Financial Economics - - General Financial Markets
G3 - Financial Economics - - Corporate Finance and Governance

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