Impact of Foreign Direct Investment on Corporate Governance Mechanisms

• In Event: Investment Behavior

Abstract

Foreign Direct Investment (FDI) has been an important factor for economic growth in emerging countries. Banking sector in Turkey has received considerable amount of FDI after 2005, due to the new regulations and EU accession talks. FDI flow has influenced the governance of banks in the sector through certain changes in ownership structure and board composition. These changes in the governance structure are expected to affect the agency costs. In order to form successful international business relationships that trigger growth, it is particularly important to document the effects of FDI on agency costs, in an emerging country setting where concentrated ownership is highly common. For this purpose, first, the impact of foreign board members on agency costs associated with bank earnings management is investigated. Then the impact of foreign ownership, multiple large shareholders, and public holdings on bank earnings management is examined. We find strong mitigating effects for the three ownership structure variables on agency costs. However, the findings suggest that having foreign board members enhances agency costs, thus their existence does not increase board independence or board monitoring in an emerging country context.

Authors

• Cagnur K. Balsari, Dokuz Eylul Universitesi

• Secil Varan, Dokuz Eylul University