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Korean Journal of Financial Studies 2012;41(5):781-812.
Published online December 31, 2012.
Investment Horizons of Foreign Investors and Corporate Dividend Policy
Sung Min Kim, Yong Won Jang
외국인투자자의 투자기간과 기업의 배당정책
김성민, 장용원
This paper investigates the effect of investment horizons of foreign investors on the dividend policy of Korean firms. Previous domestic literature has mostly focused on the relationship between foreign investors`` ownership and dividend payments without explicitly considering their monitoring role. Chen et al. (2007) argue that all institutions face a cost-benefit analysis of monitoring versus trading for the investing firm. As monitoring costs decrease with the length of time invested in the firm and monitoring benefits increase with it, they argue that long-term institutional investors will specialize in monitoring and influencing efforts rather than trading. Based on their argument, we expect the foreign investors`` monitoring need and incentive of the firm increases with their investment horizons. So our prediction is that longterm foreign investors would lead to higher dividend payments by their monitoring role. Previous overseas literature defines the portfolio turnover ratio (so called, ``churn`` rate) as the proxy variable of investment horizon of institutional investors. The portfolio turnover ratio means how frequently an institutional investor rotates his positions on all stocks of his portfolio, for any given time. They characterize institutional investors in terms of their portfolio turnover ratio. For example, short-term investors are defined as those exhibiting a high portfolio turnover. But it is important to note that portfolio turnover ratio is not based on the firm level but on the portfolio level. This paper uses the trading turnover ratio of foreign investors on each firm, not portfolio turnover ratio. We find that foreign investors`` ownership has a significant positive relationship with dividends without considering their investment horizons, as in the previous literatures. But with considering their investment horizons, we find that dividend payments do not increase as foreign investors`` ownership increases. To analyze the effect of the investment horizons in more detail, we divide foreign investors into long-term investors group or short-term investors group. We find that there is a significant positive relationship between foreign investors`` ownership and dividend payments only for the long-term investors group. These empirical results mean that dividend policy does not depend on the ownership level of foreign investors but their investment horizons. Therefore a study on foreign investors and dividend policy should take into account their investment horizons, and the previous literature without considering them has a limit. In addition, we test whether foreign investors actually affect the changes in dividend payments. If foreign investors choose to invest in firms with high dividend policy but do not influence it, then the effects of foreign investors`` ownership on change in dividends should be insignificant. We find that for only longterm foreign investors group there is a significant positive relationship between the change in their ownership and the change in dividend payments. This result is consistent with our hypothesis that only longterm foreign investors would lead to higher dividend payments by their monitoring role.
Key Words: 기업지배구조,모니터링,배당정책,외국인투자자,투자기간,Corporate Governance,Dividend Policy,Foreign Investors,Investment Horizon,Monitoring

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