Two Essays on Corporate Governance and Foreign Block Investors

Abstract

Korea is the epitome of drastically liberalized financial markets as it sought to cope with the Asian liquidity crisis. Since the corporate governance reform subsequent to the Asian financial crisis, foreign block investors have been the largest equity providers, as well as unique and independent monitors over controlling shareholders of large business conglomerates. This dissertation explores one signal of corporate governance to foreign investors shareholding and the channel through which foreign block investors affect firm value in Korea. In doing so, the first study examines how ownership-disparity disparity influences foreign investors shareholdings in the Korean firms. This study finds that distorted ownership structure negatively affects foreign investors shareholdings. Foreign investors invest less in companies with high ownership-control disparity. Foreign industrial investors who seek benefits of control from target firms invest less in companies with high disparity than foreign financial investors who generally seek financial security benefits. The findings reinforce the importance of the balanced ownership structure in corporate governance, expanding our understanding of ownership structure by considering control rights beyond controlling shareholders cash flow rights. The second study explores questions such as: What are the impacts of foreign investors and what are the channels through which foreign investors contribute to or detract from firm value in Korea? The study aims to discuss how foreign investors and foreign outside directors interact to enhance firm value. Foreign block shareholders and foreign outside directors respectively provide expertise and independent monitoring over management. Foreign blockholders management control via board membership is likely to mitigate leverage of value enhancement when foreign outside directors represent private interests of foreign blockholders. The result also confirms that board independence reinforces the positive impact of foreign outside directors on firm value. This dissertation provides clues to the extant diverse findings concerning the impact of foreign investors on firm value and offers a key to understanding corporate governance in that mutual monitoring and a balance among various types of stakeholders are crucial to value enhancement.