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A Study On The Effect Of Foreign Investors On Listed Companies

Posted on:2015-09-04Degree:DoctorType:Dissertation
Country:ChinaCandidate:Z X ( K i m JinFull Text:PDF
GTID:1109330476453937Subject:Accounting
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In January 1992, the Korean government opened up the capital market for foreign investors as follows: foreign investors’ shareholding shall not exceed 10% of the outstanding shares of a listed company; an individual foreign investor’s shareholding shall not exceed 3% of the outstanding shares of a listed company. On this basis, the Korean government planned to gradually increase the maximum limit that foreign investors could hold. In 1997, the outbreak of the Asian financial crisis led Korea to open the capital market two years ahead of schedule, allowing foreign investors to increase their shareholding of Korean listed companies dramatically. The market value of shares held by foreign investors accounted for 14.6% of the whole market value of KOSPI in 1997, but it had increased to 18.6% in 1998, and to more than 30% by 2000. Since then, foreign investors have become a major player in the Korean stock market, and later have come to hold more influence than Korean individual investors and institutional investors.Do foreign investors only pursue short-term interests and damage the long-term value of Korean companies? Or can foreign investors bring positive effects to Korean companies? Especially in the early stage of opening up the capital market, the question for foreign investors was huge, and therefore a large number of Korean scholars began to study the influence of foreign investors on Korean companies, such as how they affect corporate governance, earnings management, dividend policy and firm values. Currently, Korean investors generally believe that foreign investors obtain higher returns than domestic investors due to their advanced investment techniques and global vision. And also, the opening of capital markets caused by the external environment and dramatic changes in corporate governance also made Korean academia and industry to pay more attention to foreign investors.Foreign investors’ impact on the Korean stock market would be of reference to China and will provide some inspiration. Using data from the Korean stock market, this paper studies the effect of foreign investors on Korean listed companies from the perspective of ownership structure and attempt to answer the following three questions:(1) Do foreign investors improve corporate governance?;(2) Can foreign investors inhibit real earnings management?;(3) Do foreign investors increase firm value?Through these studies, we draw the following conclusions:(1) Regarding corporate governance, foreign investors’ ownership does improve corporate governance, and foreign blockholders also have a direct effect on corporate governance. This may be because foreign blockholders can directly affect the daily operations and even control of the company, so we should pay attention to the influence of foreign blockholders on Korean companies. In addition, foreign controlling shareholders don’t have positive effect on corporate governance index. As for sub-indices, the higher the proportion of shares held by foreign investors, the higher the indices of board of directors, disclosure, supervisory board, and profit distribution. Thus, foreign investors enhance corporate governance mainly through improving the board of directors, disclosure, the supervisory board, and profit distribution.(2) This paper also examines the influence of foreign investors on Korean listed companies from the perspective of real earnings management activities. As the proportion of shares held by foreign investors increased, real earnings management activities decreased. This shows that foreign investors can inhibit earnings management behavior. In addition, foreign blockholders also can inhibit real earnings management behavior, but the effect of foreign controlling shareholder on real earnings management activities is not inhibitive, even they can increase abnormal production cost. Further, where there is a better corporate governance environment, foreign investors’ ownership has a more significant inhibitive effect on real earnings management. The findings of the study provide empirical support for our understanding of the role of foreign investors in the supervision of listed companies. First, foreign investors have an inhibitive effect on real earnings management, indicating that foreign investors can play a supervisory role for Korean companies, thus do checks and balances on business decisions of managers. Second, better corporate governance helps foreign investors restrain management from engaging in earnings management.(3) As for the relationship between foreign investors and firm values, foreign investors’ shareholding have a significant positive effect on the firm value, but the effect of foreign blockholder and foreign controlling shareholder on the firm value is not significant. Where the proportion of shares held by foreign investors exceeds 50%, there is no positive effect or it can start to have a negative effect on the firm value. One possible reason is that there are many foreign controlling shareholders in those companies and since the majority of foreign controlling shareholders are industrial investors, it will inevitably have an entrenchment effect. In addition, there is a reciprocal causation between foreign investors’ shareholding and the firm value: not only does the presence of foreign investors in listed companies increase the firm value, but high-performing companies in turn attract foreign investors. Foreign investors can increase firm values by overseeing controlling shareholder, while foreign investors also investigate corporate performance prior to buying stocks. Finally, the findings show that foreign investors did consider corporate performance when picking stocks: foreign investors tend to invest in large-scale companies with low financial leverage, sufficient cash flow and high dividend payout ratio.
Keywords/Search Tags:foreign investor, Korean listed companies, corporate governance, real earnings management, firm value
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