The Characteristics of Foreign Investors and Stock Price Crash Risks

This study examines external monitoring by foreign investors and their role in mitigating the stock price crash risks. Managers, when not monitored by outside investors, have a tendency to make self-maximizing decisions. To camouflage these non-value-maximizing behaviors, managers control the timing of disclosure of private information. Effective external monitoring mechanisms such as foreign ownership may encourage managers to disclose private information truthfully, and the degree of external monitoring may differ according to the degree of foreign investment horizons, the form of corporate governance, and the extent of information asymmetry. In a sample of 3,993 firm-year observations over the period from 2002–2010, this paper finds that foreign investors play an important monitoring role and reduce the risk of a stock price crash. The results indicate that the degree to which firm-specific information is reflected in the stock price in a timely manner is significantly greater for foreign investors with low trading turnover than for those with high trading turnover. This suggests that foreign investors with low trading turnover monitor managerial strategic disclosure behaviors more actively, which lowers the stock price crash risk. Second, under the chaebol governance system, foreign investors may not perform the monitoring function efficiently. Finally, the impact of foreign investors’ monitoring is weaker in information environments where they are challenged by higher information asymmetry.