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Are foreign investors really beneficial? Evidence from South Korea

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  • Garner, Jacqueline L.
  • Kim, Won Yong

Abstract

We examine whether foreign investors impact corporate governance by analyzing the relation between foreign share ownership and pay-performance sensitivity. While the extant literature has examined the impact of foreign ownership, the evidence for emerging markets is limited. We test our hypotheses using a sample of Korean firms, an emerging market with unique characteristics. We find that firms with higher foreign share ownership demonstrate significant pay-performance sensitivity while their low foreign share counterparts do not, suggesting that foreign investors may be good monitors. We control for the potential self-selection bias that foreign investors may only invest in firms that have already exhibited good governance practices, and our results are unchanged. Our results suggest that foreign shareholders are able to promote improved corporate governance in an emerging market.

Suggested Citation

  • Garner, Jacqueline L. & Kim, Won Yong, 2013. "Are foreign investors really beneficial? Evidence from South Korea," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 62-84.
  • Handle: RePEc:eee:pacfin:v:25:y:2013:i:c:p:62-84
    DOI: 10.1016/j.pacfin.2013.08.003
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    2. Kim, So Yeon & Lee, Kang Ryun & Shin, Hyun-Han, 2017. "The enhanced disclosure of executive compensation in Korea," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 72-83.
    3. Pham, Nga & Oh, K.B. & Pech, Richard, 2015. "Mergers and acquisitions: CEO duality, operating performance and stock returns in Vietnam," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 298-316.
    4. Cheong, Juyoung & Kim, Woochan, 2014. "Revisiting Executive Pay in Family-Controlled Firms: Family Premium in Large Business Groups," MPRA Paper 59250, University Library of Munich, Germany.
    5. Chauhan, Yogesh & Kumar, Satish, 2017. "Does founder ownership affect foreign investments? Evidence from India," Emerging Markets Review, Elsevier, vol. 32(C), pages 116-129.
    6. Chauhan, Yogesh & Kumar, Surya B., 2019. "Does accounting comparability alleviate the informational disadvantage of foreign investors?11We thank the editor, Professor Carl R. Chen, and two reviewers for their comments that greatly improved th," International Review of Economics & Finance, Elsevier, vol. 60(C), pages 114-129.
    7. Kong, Dongmin & Zhu, Ling & Yang, Zhiqing, 2020. "Effects of foreign investors on energy firms' innovation: Evidence from a natural experiment in China," Energy Economics, Elsevier, vol. 92(C).

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    More about this item

    Keywords

    Corporate governance in Korea; Pay-performance sensitivity; Foreign shareholders;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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