Firm-specific investor sentiment and stock price crash risk: The role of foreign investors in Korea’s stock market

Abstract

Building on a prior study that documents that stock price crashes are positively associated with firm-specific investor sentiment (hereafter, the sentiment), this study further investigates the moderating effect of foreign investors on Korea’s stock market. This study hypothesizes that foreign investors as sophisticated participants are indifferent of the significant relationship between the sentiment and the stock price crashes. For firms listed on the KSE over the period of 2011–2019, the analysis findings show that the high stock crash risk attributable to the high sentiment is attenuated for firms with high foreign ownership. However, such moderating effect of foreign ownership disappears when taking foreign investment horizon into consideration. This implies that future stock crash risk reduction under the high sentiment is due to the corporate monitoring role of foreign investors, who are targeting a long-term investment horizon. This study adds to the literature on the role of foreign investors by suggesting that foreign investors act as a rigorous monitor helpful for managing stock price, rather than a price maker who is rational under the high sentiment.

Keywords

• corporate governance
• foreign investor
• investor sentiment
• investor sophistication
• stock crash