Does Corporate Governance Risk at Home Affect Investment Choices Abroad?

42 Pages Posted: 8 May 2008 Last revised: 9 Sep 2011

See all articles by Woochan Kim

Woochan Kim

Korea University Business School; European Corporate Governance Institute (ECGI); Asian Institute of Corporate Governance (AICG)

Taeyoon Sung

Yonsei University, School of Economics

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

Date Written: May 9, 2011

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.

Suggested Citation

Kim, Woochan and Sung, Taeyoon and Wei, Shang-Jin, Does Corporate Governance Risk at Home Affect Investment Choices Abroad? (May 9, 2011). Journal of International Economics, Vol. 85, No. 1, 2011; U of Texas Law, Law and Econ Research Paper No. 129; KDI School Working Paper No. 07-08. Available at SSRN: https://ssrn.com/abstract=1124902

Woochan Kim (Contact Author)

Korea University Business School ( email )

LG-POSCO Bldg #524
Anam-Dong, Seongbuk-Ku
Seoul, Seoul 136701
+822-3290-2816 (Phone)
+822-922-7220 (Fax)

HOME PAGE: http://biz.korea.ac.kr/professor/wckim

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Asian Institute of Corporate Governance (AICG) ( email )

1, 5-ga, Anam-dong
Sungbuk-gu
Seoul, 136-701
Korea, Republic of (South Korea)

Taeyoon Sung

Yonsei University, School of Economics ( email )

50 Yonsei-Ro
Seoul, 120-749
Korea, Republic of (South Korea)
+82-2-2123-5494 (Phone)

Shang-Jin Wei

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Tsinghua University - School of Economics & Management

Beijing, 100084
China

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