The Role of the Foreign Sector as a Corporate Governance Mechanism in Korea

In this paper, we discuss the role of the foreign sector as a corporate governance mechanism. We divide the foreign sector into three: foreign consumers, foreign shareholders, and foreign creditors. Analyzing 1,009 manufacturing companies remaining listed in the KOSPI and KOSDAQ markets of Korea from 2002 to 2008, we show that foreign shareholders play an active monitoring role on the management alleviating the agency problem while foreign consumers and foreign creditors tend to cooperate with managers or countenance managers’ misconducts worsening the problem. Foreign shareholders seem to effectively deter managers’ pursuit of private benefits through advanced monitoring and managerial skills. However, foreign creditors and foreign consumers do not due to information asymmetry, geographical distances, and linguistic, cultural, and legal differences. Such a result has been confirmed robust to different statistical techniques of the random effects panel regression analysis, the random effects AR(1) panel regression analysis, and the random effects instrumental variable panel regression analysis.