This paper examines whether foreign investors in Korea affect incentives for firms to take risks in corporate investment. The short-term focus of foreign investors encourages managers to engage in conservative investment behavior. On the other hand, foreign investors encourage managers to focus on long-term value rather than short-term returns as active participants in corporate governance. These competing views are examined by testing for the association between foreign ownership and variations in corporate cash flow, a proxy for the risk of chosen investments. Furthermore, we examine whether risk taking is positively associated with firm growth, which is a primary concern in debates regarding the myopic behaviors of foreign investors. The results show that firms with high foreign ownership are less likely to avoid risk taking-and that risk taking is, in turn, positively associated with firm growth, implying that foreign investors perform a monitoring function in encouraging value-enhancing risk taking.

Dependent variables used by Kim, Jung and Kim (2005) to assess the effect of the ownership structure of Korean chaebols on internal funds allocations are a priori misspecified in the context of their research, as they were designed to be applied when studying diversified firms and not groups consisting of legally independent entities. The conditions under which this misspecification has no effect on their conclusions are discussed. Re-analyzing their data with a more appropriate internal funds allocation variable leaves their conclusion on the presence of tunnelling effects intact, though it paints a partly different picture of internal allocations as such.