earticle

영어

We investigate how the level, and changes in the level of foreign ownership affect the cost of equity capital. We measure the implied cost of equity capital using two residual income valuation (RIV) models that assume a clean surplus relation, and two abnormal earnings growth (AEG) models that do not. Controlling for a comprehensive set of risk proxies, we find that foreign ownership and implied costs of equity capital are inversely related. Past changes in the level of foreign ownership negatively affect the changes in the cost of capital. This is a novel finding to the literature, as the effect of foreign ownership on the cost of equity has not been extensively researched in the Korean setting. Moreover, the empirical question of whether foreign ownership affects KOSPI or KOSDAQ firms more extensively is answered – the changes in foreign ownership has more economic impact and stronger statistical significance in the subset of KOSPI firms, suggesting that higher levels of information asymmetry in KOSDAQ firms still lead to higher required rates of return for investors.