Shareholder Vigilance and the Role of External Monitoring

Abstract

In order to control agency problem, several corporate governance mechanisms have been invented and used. However, the intensity of the usage of the mechanisms, such as board or directors and external auditing is different among companies. The focus of this research is on external monitoring which has substituting effect for monitoring by the board. The research investigates into the relationship between the ownership structure and external monitoring and finds moderating influence on the relationship. The paper examines 1,078 firms listed in the Korea Stock Exchange in the manufacturing industry for the period between 2003 and 2013 to empirically test the hypotheses on ownership structure and external monitoring. The results shows concentration of ownership has negative association with external monitoring while foreign ownership and group affiliation are associated positively. It was also found that concentration of ownership strengthened the relationship between foreign and group affiliation and external monitoring. The research demonstrates that different incentive and ability each firm possesses have effects on the behavior to adjust agency cost.