Are Foreign Investors Really Beneficial? Evidence from South Korea

We examine whether foreign investors impact corporate governance by analyzing the relation between foreign share ownership and pay-performance sensitivity. While the extant literature has examined the impact of foreign ownership, the evidence for emerging markets is limited. We test our hypotheses using a sample of Korean firms, an emerging market with unique characteristics. We find that firms with higher foreign share ownership demonstrate significant pay-performance sensitivity while their low foreign share counterparts do not, suggesting that foreign investors may be good monitors. We control for the endogenous bias that foreign investors may only invest in firms that have already exhibited good governance practices, and our results are unchanged. We also find that the highest pay-performance sensitivity appears in chaebol firms with higher foreign share ownership. Our results suggest that foreign shareholders are able to promote improved corporate governance in an emerging market