How do foreign investors affect corporate policy? Evidence from Korea

This paper focuses on a mechanism through which foreign investors affect corporate policy in emerging economies. We hypothesize that foreign investors who provide effective monitoring may affect corporate policy through pushing for a greater proportion of outsiders or foreigners on the board of directors who are less affiliated with controlling shareholders. Using the unique features of foreign ownership in Korea, we find that firms with an increase in foreign ownership are more likely to increase the fraction of outsiders and foreign directors on the board in the subsequent year. Increased board independence in response to a pressure from foreign investors results in a significant change in payout and investment policy.