The Effect of Foreign Investors on the Cost of Equity Capital in Korean Stock Market

This study investigates the effect of foreign investors on the cost of equity capital. Although foreign investors have significant influence in the Korean stock market, limited empirical results are being documented on how they contribute to the stock market. In this study, we explore the contributive role of foreign investors in terms of the cost of equity capital in Korean stock market. We perform empirical tests using 3,110 firm-year observations from 2002 to 2015 and find that there is a significantly negative association between foreign ownership and cost of equity capital. This result means that foreign investors help to reduce the cost of equity capital by mitigating agency costs in Korean stock market. This study is expected to contribute to the market participants and academia by providing empirical evidence that foreign investors would play a positive role in the Korea.