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

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  • Woochan Kim
  • Taeyoon Sung
  • Shang-Jin Wei

Abstract

Disparity between control and ownership rights gives rise to the risk of tunneling by the controlling shareholder, and is prevalent in many emerging market economies and present in some developed countries. At the same time, international investors come from different countries whose home markets are characterized by varying degrees of control-ownership disparity. This paper studies whether this difference 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 the analyses of their portfolio choice.

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Bibliographic Info

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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Publication status: published as Woochan Kim, Taeyoon Sung, Shang-Jin Wei Does corporate governance risk at home affect investment choices abroad? ☆ Journal of International Economics, Volume 85, Issue 1, September 2011, Pages 25–41
Handle: RePEc:nbr:nberwo:13721

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Cited by:
  1. Yohei Okawa & Eric van Wincoop, 2010. "Gravity in International Finance," Working Papers 072010, Hong Kong Institute for Monetary Research.
  2. Kristin J. Forbes, 2008. "Why do Foreigners Invest in the United States?," NBER Working Papers 13908, National Bureau of Economic Research, Inc.
  3. Kim, Woochan & Sung, Taeyoon & Wei, Shang-Jin, 2011. "Does corporate governance risk at home affect investment choices abroad?," Journal of International Economics, Elsevier, Elsevier, vol. 85(1), pages 25-41, September.
  4. Aggarwal, Reena & Erel, Isil & Ferreira, Miguel & Matos, Pedro, 2011. "Does governance travel around the world? Evidence from institutional investors," Journal of Financial Economics, Elsevier, Elsevier, vol. 100(1), pages 154-181, April.

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