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The Influence of Foreigners’ Stock Investment on Korean Stock Prices and Its Implications(EP 9-2)

Economic Research Institute (Tel:82-2-759-5411) 2007.01.04 5545

The Influence of Foreigners’ Stock Investment on Korean Stock Prices and Its Implications(Economic Papers Vol.9 No.2)

Author: Sangwon Suh(Economist, Finance Studies Team, Institute for Monetary and Economic Research, The Bank of Korea)

Foreign investors have quickly come to account for a very high share of Korean stock market capitalization since the partial opening of the Korean stock market in 1992. This stock investment by foreigners has been lauded for its role in fund-raising for Korean firms and improving corporate governance.
  On the other hand, foreigners' stock investment in Korea has accentuated the dispersion of Korean stock prices due to preferences for exporting and/or large scale firms, which presumably arises from information asymmetries, along with foreign investors' increased influence on stock price formation. The heightened degree of stock price dispersion in Korea can be attributed in part to the economic polarization that occurred after the Asian currency crisis; however, foreigners' stock investment is also responsible. Foreigners' biased investment pattern may bring about a situation where stock investment is not based on firms' performance but on foreign investors' preferences, shutting off some firms from the benefits of the openness of the stock market to foreign investors.
  It is crucial to reduce the information asymmetries faced by foreign investors by fostering investor relations (IR), improving accounting transparency and the credibility of corporate disclosure. It is also highly desirable for institutional investors to play a bigger role, bringing about a reduction in the tendency of individual investors to follow foreign investors' pattern of stock investment.