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

Author

Listed:
  • 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.

Suggested Citation

  • Woochan Kim & Taeyoon Sung & Shang-Jin Wei, 2008. "How Does Corporate Governance Risk at Home Affect Investment Choices Abroad?," NBER Working Papers 13721, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13721 Note: CF IFM
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    References listed on IDEAS

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    Cited by:

    1. Forbes, Kristin J., 2010. "Why do foreigners invest in the United States?," Journal of International Economics, Elsevier, pages 3-21.
    2. Aggarwal, Reena & Erel, Isil & Ferreira, Miguel & Matos, Pedro, 2011. "Does governance travel around the world? Evidence from institutional investors," Journal of Financial Economics, Elsevier, vol. 100(1), pages 154-181, April.
    3. Kim, Woochan & Sung, Taeyoon & Wei, Shang-Jin, 2011. "Does corporate governance risk at home affect investment choices abroad?," Journal of International Economics, Elsevier, pages 25-41.
    4. Okawa, Yohei & van Wincoop, Eric, 2012. "Gravity in International Finance," Journal of International Economics, Elsevier, pages 205-215.
    5. Cheung, Yin-Wong & Friedman, Daniel, 2009. "Speculative attacks: A laboratory study in continuous time," Journal of International Money and Finance, Elsevier, pages 1064-1082.

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets
    • G3 - Financial Economics - - Corporate Finance and Governance

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