An Effect of Foreign Monitoring on Agency Costs and Firm Value

This study examines whether the presence of foreign block shareholders and foreign directors reduces agency costs and improves firm value in Korea. Foreign block shareholders and foreign directors are expected to be incentivised to monitor their invested firms since they presumably are in an independent status with expertise. In addition, this study identifies a differential effect of having foreign monitors on agency costs and firm value between owner-controlled ones and professional management- controlled ones. The final data set used consists of 1,822 companies listed on the Korea Stock Exchange as non-financial ones from 2000 to 2003. As long as foreign block shareholders and foreign directors are present in the firms, agency costs are reduced and firm value is increased due to higher efficiency of asset utilization. This result suggests the effectiveness of foreign monitoring of invested companies. With foreign block shareholders, both reduction of agency costs and increase in firm value are larger in professional management-controlled ones than in owner- controlled ones. Although the presence of foreign directors does not influence reduction of agency costs, its presence improves the firm value of professional management- controlled ones more than that of owner-controlled ones.