Working Paper: NBER ID: w13721
Authors: Woochan Kim; Taeyoon Sung; Shangjin 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.
Keywords: Corporate Governance; Investment Choices; Emerging Markets; Foreign Investment
JEL Codes: F3; G1; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| control-ownership disparity (G34) | investment choices (G11) |
| low control-ownership disparity (G34) | avoidance of high-disparity stocks (G11) |
| Asian financial crisis (F65) | aversion to high control-ownership disparity (G34) |
| home country governance (G38) | investment choices in Korea (G11) |
| low-disparity countries (O57) | aversion to disparity levels in Korean firms (L22) |
| high-disparity countries (O57) | indifference toward disparity levels in Korean firms (L22) |