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Korean J Financ Stud > Volume 46(4); 2017 > Article
Korean Journal of Financial Studies 2017;46(4):839-877.
DOI: https://doi.org/10.26845/KJFS.2017.    Published online September 30, 2017.
The Effects of Foreign Investors on Firms’ Crash Risk
Hyeonsook Kim, Soonhong Park
외국인 투자자가 기업의 주가급락위험에 미치는 영향
김현숙, 박순홍
This paper investigates the role of foreign investors on firm’s crash risk. Previous studies have mostly focused on the relationship between foreign investors and the firm’s particular activities, such as dividend and/or investment policy. However this paper investigates the role of foreign investors in terms of the firm’s overall activities using the firm’s crash risk measured by the firm-specific returns. Recent studies on firm’s crash risk maintain that withholding bad news by managers leads to a large and sudden price decline. In particular, empirical evidences support that outside monitors mitigate the crash risk by reducing opportunities for managers to engage in bad news hoarding activities. Hence, this paper investigates whether foreign investors with respect to agency problems explain the firm’s crash risk, especially considering their ownerships and investment horizons.
The findings are summarized as follows. First, we find that there are no significant relationships between the existence and ownerships of foreign investors and crashes. These results suggest that the foreign investors with a large ownership stakes can act not only as monitors by curbing managerial bad news hoarding activities but also as short-termism traders by exacerbating the tendency of managers to engage in bad news hoarding. Thus, these opposite effects may be cancelled out, and then increased foreign ownerships are not related to the firm’s crash risk. Second, foreign investor’s investment horizons have no impacts on crash risk either, implying that long-term investment horizons without sufficient shares can not monitor management effectively and reduce crash risk. Finally, we find that the negative relationships between the foreign investors’ ownerships with considering their long-term investment horizons and the firm’s crash risk. Our evidences suggest that large stakes-long term foreign investors can only play a role in reducing future stock price crash risk and agency costs through preempting managerial bad news hoarding activities.
Overall, our study contributes to the ongoing debate about the role of foreign investors and provides investors with an effective strategy to help predict future stock price crash risk in their portfolio investment decisions by identifying a new factor of future stock price crash risk.
Key Words: 외국인 투자자,주가급락위험,대리인 이론,기업지배구조,투자기간,Foreign Investor,Stock Price Crash Risk,Agency Theory,Corporate Governance,Investment Horizons

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