Do Foreign Stock Investors Care about Domestic Politics?

• In Event: Foreign Investments by Firms and Citizens

Abstract

International political economy literature often assumes that foreign investors intentionally put direct pressure behind state policies by making threats of capital withdrawal. In other words, the literature proposes that foreign agents are not only well-informed about domestic policy-making, but become masters of the government, largely diminishing the capacity of a government to pursue divergent state policies. However, such hypothetical portrayal that foreign actors are deeply engaged in domestic politics has not been properly tested. We hypothesize that if inner political dynamics are their primary concerns, Foreign Portfolio Stock Investors (FPSIs) should identify likely beneficiaries of the new political regime by increasing a share of their investment portfolio into politically connected firms. Using the event study framework, we analyze the 2012 South Korean parliamentary and presidential elections, based on a unique dataset of political affiliations of 4,936 boards of directors. Our unique firm-level analysis confirms that different from domestic stock investors, foreign agents failed to respond swiftly to political outcomes supplied by two consecutive elections. By demonstrating that appropriate micro-level information is not available to multinational investors, our paper sheds light on foreign sources of influence in the domestic political arena.

Authors

• Seungjun Kim, University of Maryland, College Park

• Kai Jäger, University of Mannheim, MZES