The Diffusion of Corporate Governance to Emerging Markets: Evaluating Two Dimensions of Investor Heterogeneity

ECGI – Finance Working Paper No. 421/2014

54 Pages Posted: 21 May 2014

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 University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: May 20, 2014

Abstract

This paper investigates whether foreign institutional investors in emerging markets can enhance shareholder value. We pay special attention to two dimensions of investor heterogeneity: whether an investor declares itself as an activist, and whether an investor comes from a country with a strong tradition of investor activism. First, we apply an event study approach to the announcements of block purchases by foreign institutional investors in Korea. We find that stock prices rise on average, but only when foreign institutional investors declare themselves as activists. Source country identities also matter: The positive stock price reactions are more pronounced when the activist investors come from source countries with a strong tradition of investor activism. Second, we examine corporate financial policies and governance practices of target firms one to three years following block purchases by foreign activist investors. We find that target firms are more likely to reduce cash holdings, raise leverage ratios, and peg dividend payouts and stock repurchases more closely to changes in earnings, but only if foreign activists are from countries with a strong tradition of activism. We conclude that openness to foreign activist investors, especially those from countries with a strong tradition of activism, can indeed put pressures on firms in emerging markets to adopt corporate governance practices that enhance shareholder values.

Keywords: foreign block investors, activist investors, corporate governance, emerging markets

JEL Classification: F21, G11, G15, G23, G32, G34, G35

Suggested Citation

Kim, Woochan and Sung, Taeyoon and Wei, Shang-Jin, The Diffusion of Corporate Governance to Emerging Markets: Evaluating Two Dimensions of Investor Heterogeneity (May 20, 2014). ECGI – Finance Working Paper No. 421/2014, Available at SSRN: https://ssrn.com/abstract=2439306 or http://dx.doi.org/10.2139/ssrn.2439306

Woochan Kim

Korea University Business School ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Asian Institute of Corporate Governance (AICG) ( email )

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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 (Contact Author)

Columbia University - Columbia Business School, Finance ( 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

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