Foreign ownership and firms' governance quality

Abstract

This thesis provides new empirical evidence on the implications of corporate governance by investigating the conjecture that bad governance of firms in a low investor protection country can be improved by association with good governance mechanism. Three main results are found. First, the effect of a large foreign shareholder on shareholder value is unclear because the existence of a large foreign foreign shareholder has a positive effect on firm's ROA and is not strongly significant. There is no effect on firm value, firm's ROE, and stock liquidity. Moreover, the relationship between shareholder value and foreign ownership is opposite from entrenchment hypothesis. The relationship between shareholder value and foreign ownership is negative at low level of ownership, but become positive at the medium level. It decreases again once ownership level become high. This indicates wealth of a local company expropriated by a large foreign shareholder at the very high level of ownership. Second, a large foreign shareholder specifically from a good investor protection country, exhibits negative impact on shareholder value - implying that the wealth of a local company may be easily expropriated if located in a low protection country. Finally, the impact of a large foreign shareholder on shareholder value pre and post the corporate governance promotion by authorities is not significantly different. In other words, the role of a large foreign shareholder on firm's governance remains similar between pre and post the corporate governance promotion. The result implies that Thailand's level of corporate governance had not changed since the financial crisis of 1997. From all the results, this thesis seeks a different perspective on the role of a large foreigner shareholder in firm's governance located in an emerging market, the Thai market.