Abstract

Recently, the practice of good corporate governance has become a necessary step for any corporation to manage in the global market. To maintain good corporate governance is an important factor in building market confidence and encouraging stable, long-term foreign investment. Therefore many countries see good corporate governance practices as a way to improve economic performance. In many emerging countries including korea try to improving corporate governance practice to attract foreign investment. In korea corporate governance had become growing concern after Asian financial crisis in 1997. The government officials and regulators impose many restrictions on large firms such as board composition. Government officials and market participants express concerns that poor governance hinders foreign investment and may delay financial development. But rapid globalization makes firms to adapt good corporate governance. It is widely researched and debated that foreign investment is a important element for improving corporate governance in emerging markets. The policy makers has popular view that foreign ownership influences firm performance and profitability. This view derives from presumption that foreign investment is a conduit for technology, capital injection, management skills and various intangibles that promote efficiency. Prior research results tells us that foreign investment improve corporate governance and firm profitability.Based on this hypothesis, I used Cross-Sectional Regression to investigate positive result between foreign investment and corporate governance. This research would contribute for future emerging market corporate governance research. The purpose of this study is to examines the effects of foreign ownership on firm performance and corporate governance, and also investigated casual relationship between foreign ownership and corporate governance in korean listed companies. This study used the cross-sectional regression analysis to examine the foreign investor's effect on the corporate governance and firm performance. Futhermore, I used two-stage least squares approach(2SLS) to investigate the causal relationship between foreign investment and corporate governance. This study used 2nd stage least squares method to mitigate plausible endogeneity by using ordinary least squares method. Since a number of important Korean corporate governance rules apply only to firms with assets over 2 trillion won, an indicator variable for firms with assets over 2 trillion won is adopted as an instrument variable. This study found foreign ownership has a positive effect on corporate governance in 5 year OLS analysis. This result indicate higher foreign ownership leads higher corporate governance index. This empirical analysis shows very strong statistical results at over 99 percent confidence level. This results are the same in yearly OLS analysis. It means positive relationship between foreign ownership and corporate governance index is not temporal. We used 2SLS to investigate casual relations between foreign ownership and corporate governance. The results also shows positive at over 99 percent confidence level. This result proved that corporate governance is not directly effect on foreign ownership, rather foreign ownership effect corporate governance. The instrumental variable approach I adopted provide evidence for a casual relationship between foreign ownership and corporate governance index: foreign investment leads to a higher governance index. It means that an increase on foreign ownership has a direct effect on the corporate governance index of Korean companies. In spite of this research results, we can extend the research. For example, we can examine in depth any difference in foreign institutional investors and industrial investors. Both investors' behavioral pattern difference can be studied depending on corporate governance structures.

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