How Does Corporate Governance Risk at Home Affect Investment Choices Abroad?

Disparity between control and ownership rights gives rise to the risk of tunneling by the controlling shareholder. This disparity is prevalent in many emerging market economies and present in some developed countries. This paper studies whether and how the degree of control-ownership disparity in investors' home countries affects their portfolio choice in an emerging market. It combines two unique data sets on ownership and control in business groups, and investor-stock level foreign investment in Korea. A key finding is that, investors from low-disparity countries disfavor high-disparity stocks in Korea, but investors from high-disparity countries are indifferent. Moreover, investors from low-disparity countries became averse to disparity only after the Asian financial crisis. These results suggest that the nature of corporate governance in international investors' home countries affects their portfolio choice abroad, and therefore that these investors should not be lumped together in analyses of their portfolio choice.

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