Does control-ownership disparity matter to foreign investors in Korea?

This study examines the effect of control-ownership disparity on foreign investors investing in Korean firms. Control-ownership disparity occurs when certain shareholders of a firm have actual voting power that exceeds the corresponding equity ownership. This may matter to foreign investors because the disparity gives rise to the risk of tunneling by the controlling shareholders. The empirical results show that foreign investors prefer firms with low control-ownership disparity, suggesting that they are sensitive to corporate governance of firms they invest in. More interestingly, foreign portfolio investors are more sensitive to control-ownership disparity than foreign strategic investors who are usually corporations in related industries. Further, the control-ownership disparity has stronger negative effects on foreign portfolio investors when they invest in Chaebol-affiliated firms than non-Chaebol firms.