The Role of Foreign Shareholders in the Performance of Korean Manufacturing Firms

Abstract

This paper seeks to investigate the relationship between foreign shareholders, Tobins Q ratio, investment, and dividend policy of Korean manufacturing firms from 2005 to 2014. We estimated the Tobins Q ratios of firms by calculating the market values of equities and liabilities and of replacement costs, rather than simply using market-to-book ratios. To cope with the endogeneity among the variables of interest, we adopt the simultaneous equation model of Cho (1998) and use three-stage linear squares (3SLS) estimation and two-step system GMM dynamic panel estimation to analyze our models. Empirical analysis on the three-equation model of Tobins Q ratio, investment, and foreign investors share of stocks shows that the effect of foreign shareholders on Tobins Q ratio was positive and significant in the aftermath of the global financial crisis. Also, foreign shareholders had a negative effect on investment from 2001 to 2005, which supports the conclusion of Kim and Cho (2007), such effect disappeared in the recent decade. Therefore, at least during the period from 2005 to 2014, there is no evidence that foreign shareholders reduce investment. Lastly, foreign investors buy more stocks if Tobins Q ratio is higher. To check the robustness of our conclusions, we constructed a four-equation model by including dividend payout ratio in the three-equation model as an additional endogenous variable and estimated the four-equation system with the same methods. Besides confirming the conclusions of the three-equation model, our four-equation model suggests that foreign shareholders increase dividend payout ratio and vice versa, implying that there is a strong positive relationship between foreign ownership and dividend policy.