The Impact of Foreign Investors on the Stock Price of Korean Enterprises During the Global Financial Crisis

sustainability

Article The Impact of Foreign Investors on the Stock Price of Korean Enterprises during the Global Financial Crisis

Yoonmin Kim † and Gab-Je Jo *,†

Department of Economics and Finance, Keimyung University, Daegu 42601, Korea; [email protected] * Correspondence: [email protected]; Tel.: +82-53-580-5407 † Y.K. is the ﬁrst author, G.J. is the corresponding author.

Received: 17 January 2019; Accepted: 11 March 2019; Published: 15 March 2019

Abstract: This paper investigates the impact and behavior of foreign equity investment on the price of the nine largest KOSPI (Korea Composite Stock Price Index) enterprises and Samsung Electronics preference stocks in terms of market capitalization during the global ﬁnancial crisis (2 January 2007 to 30 December 2008). The empirical results indicate that foreign investors show strong, positive feedback trading behavior with regard to the stock price of Samsung Electronics, which is the largest KOSPI enterprise in terms of market capitalization. We also found evidence that the behavior of foreign investors signiﬁcantly increased volatility in the stock returns of the two largest Korean conglomerates (Samsung Electronics and Hyundai Motors), which account for approximately 25 percent of total KOSPI market capitalization.

Keywords: foreign investor groups; individual investor groups; institutional investor groups; volatility; capital market openness; information asymmetry; sustainable capital market; emerging markets

1. Introduction There is considerable debate over whether foreign investors stabilize or destabilize domestic stock markets. Foreign investors are often blamed for difficulties in the Korean economy, such as the collapse of both the Won and the stock market. A check was conducted to ascertain whether foreign investors increased the volatility of daily stock returns more than domestic investors in the nine largest KOSPI (Korea Composite Stock Price Index) enterprises and Samsung Electronics preference stocks (Samsung Electronics, Samsung Electronics (Preference Share), Hyundai Motors, KEPCO (Korea Electric Power Corporation), POSCO (Pohang Iron and Steel Company), SK Hynix, NAVER, Amore Pacific, and Samsung C&T (Construction & Trading Corporation)) during the global financial crisis. Most research regarding the behavior of each investor group in the Korean stock market took place during the Asian financial crisis period, and not particularly the global financial crisis. Inclusive, the research was performed at the state or industrial level. Therefore, we decided to investigate behavior at the firm level (the price of the nine largest KOSPI enterprises and Samsung Electronics preference stocks) during the recent global financial crisis period from 2 January 2007 through 30 December 2008. This research is a comparative analysis of the different roles and impact of foreign equity investments on market volatility in emerging Asian markets. Our research presents advice for maintaining sustainable capital market development in emerging markets. In our paper, “sustainable capital market development” means stable capital market development that prevents possible speculative attacks and sudden breaks in capital inflow. Our research could serve as a wakeup call to prevent the outflow of national wealth in emerging markets. Therefore, we maintain that our research can contribute to sustainability in emerging Asian markets. This paper suggests that

Sustainability 2019, 11, 1576; doi:10.3390/su11061576 www.mdpi.com/journal/sustainability Sustainability 2019, 11, x FOR PEER REVIEW 2 of 13 to prevent the outflow of national wealth in emerging markets. Therefore, we maintain that our research can contribute to sustainability in emerging Asian markets. This paper suggests that

Sustainabilityresearchers,2019 policy, 11, 1576 officials, and market participants should find it useful to keep both approaches2 of in 13 their tool kits for analysis. In order to study the interrelationship between variables, the empirical procedure began with researchers,the study of policydynamic officials, relationships and market between participants interested should variables. find it usefulIn order to to keep study both the approaches behavior inof theirequity tool flows kits and for analysis.their effects on the stock prices of the nine largest Korean enterprises and Samsung ElectronicsIn order preference to study theshares, interrelationship vector autoregres betweension variables, (VARS) thewas empirical employed procedure to investigate began with the thedynamic study relationship of dynamic between relationships daily between percentage interested changes variables. in the volatility In order of to the study stock the price behavior and the of equitydaily percent flows and changes their effectsin the onnet the buy stock ratio prices (NBR) of for the Korean nine largest institutions, Korean enterprisesKorean individuals, and Samsung and Electronicsforeign investors. preference Second, shares, the vector Granger-causality autoregression was (VARS) applied was to employed explore tothe investigate casual relationship the dynamic in relationshipeach of the variable between systems. daily percentage Lastly, the changes plotted in im thepulse volatility response of thefunction stock priceof the and variable the daily system percent was changesalso employed. in the net buy ratio (NBR) for Korean institutions, Korean individuals, and foreign investors. Second,The thepaper Granger-causality proceeds as follows: was applied In Section to explore 2 we the describe casual relationshipthe research inbackground each of the and variable our systems.motivation. Lastly, In Section the plotted 3 the impulse literature response is reviewed function to note of the any variable destabilization system was in the also domestic employed. stock marketThe caused paper by proceeds foreign investors. as follows: In InSection Section 4 we2 we investigate describe whether the research foreign background investors engage and our in motivation.positive feedback In Section trading3 the and literature destabilization is reviewed of the to Korean note any stock destabilization market at the in firm the domesticlevel and stocknot at marketthe state caused or industry by foreign level. investors.We explain In our Section findings4 we in investigate Section 5. whether foreign investors engage in positive feedback trading and destabilization of the Korean stock market at the firm level and not at the2. Research state or industryBackground level. We explain our findings in Section5.

2. ResearchKorea is Background considered an emerging market that has experienced large foreign capital outflows twice, during both the Asian crisis in 1997 and the global financial crisis in 2008. Nonetheless, the KoreanKorea economy is considered stands anas the emerging 12th largest market economy that has in experienced the world largebased foreign on GDP capital in 2017. outflows The Korean twice, duringstock market both the started Asian crisisthe liberalization in 1997 and theprocess global in financial early 1992, crisis inlifting 2008. most Nonetheless, foreign theownership Korean economyrestrictions stands in May as the1998 12th due largest to the economy IMF bailou in thet. worldSince basedthen, the on GDPKorean in 2017. economy The Koreansuccessfully stock marketovercame started the 1997 the liberalizationAsian crisis and process restructured in early 1992,the country’s lifting most economy. foreign In ownership this regard, restrictions the Korean in Maymarket 1998 provides due to a the good IMF case bailout. for evaluation Since then, of the the impacts Korean and economy roles of successfully foreign investors overcame in emerging the 1997 Asianmarkets. crisis and restructured the country’s economy. In this regard, the Korean market provides a goodIn case 2004, for evaluationthe proportion of the of impacts Korean and market roles ofcapitalization foreign investors held in by emerging foreign markets.investors hit the maximum,In 2004, which the proportion was 40.5 of percent Korean marketwith the capitalization proportion helddecreasing. by foreign In investors 2018, the hit foreign the maximum, equity whichownership was was 40.5 about percent 31.3 with percent the proportion of KOSPI total decreasing. market capitalization. In 2018, the foreign However, equity as shown ownership in Figure was about1, the share 31.3 percent of foreign of KOSPI investors total in market Korean capitalization. blue chips was However, generally as higher shown than in Figure the regular1, the share KOSPI of foreignstocks (except investors KEPCO in Korean and blueSK Hynix). chips was Moreover, generally there higher was than a continuous the regular increase KOSPI in stocks proportion. (except KEPCOTherefore, and we SK decided Hynix). to perform Moreover, the there research was at a the continuous firm level increase and not inat the proportion. state or industrial Therefore, level. we decided to perform the research at the firm level and not at the state or industrial level.

Figure 1. Foreigner’s share of Korean Enterprises’ stock. Sustainability 2019, 11, 1576 3 of 13

3. Literature Review Choe et al. [1] examined the impact foreign investors had on stock returns in Korea from 30 November 1996 to the end of 1997, using order and trade data. The authors classified buying and selling investors into three categories: Korean individual investors, Korean institutional investors, and foreign investors based on data availability. The authors measured abnormal returns for 11 five-minute intervals that were centered on the intervals with large foreign trades of the stock in their sample. For the second test, days were used instead of five-minute intervals. The authors followed the approach of Lakonishok et al. [2] and Wermers [3] to estimate positive feedback trading and herding. This approach was used to compute the herding measure, by using daily horizon and treating each trade on a given day by different investment groups. (The herding measure is computed as |pit − E (pit)| − E |pit − E(pit)|, where pit is the proportion of foreign investors buying stock i on day t among all foreign investors trading that stock on that day and E (pit) is the expected proportion of foreign investors buying on day t relative to all foreign investors. E |pit − E(pit)| is an adjustment factor computed assuming that in the absence of herding, the number of foreign investors with net purchases follows a binomial distribution.) The authors documented strong evidence of positive feedback trading and herding by foreign investors in South Korea before the Asian financial crisis period; however, these patterns disappeared during the crisis. The authors of References [2,3] concluded that foreigners did not destabilize the Korean stock market during the Asian crisis. Nimitvanich [4] examined the daily data from the SET index (the composite index for the Thai stock exchange) and net foreign flows from 1995 to 2010. Nimitvanich applied vector autoregression (VARS) to investigate the relationship between the daily return of the SET index and the net foreign flow. He found strong evidence that foreign investors follow positive feedback or momentum trading because foreign flows are positively related to prior returns. Moreover, he found that foreign investors had some ability to forecast local equity returns. It has been suggested that the causes of Korean stock market volatility were double-dip worries, the fear factor, foreign economy uncertainty, and lack of political leadership. However, foreign investors are still harshly blamed for the difficulties in the Korean economy such as the collapse of the Won and the stock market. High volatility and reversibility caused by foreign investors are very important issues for the Korean stock market. Jo [5] found evidence that equity investment activities by foreigners were more reversible than domestic investment during the Asian crisis. (Using two stage least squares (TSLS), Jo [5] investigated the impact of the absolute value of net purchases by three investor groups on daily stock market volatility, measured using the generalized autoregressive conditional heteroskedasticity (GARCH) model.) In addition, he found that foreign equity investors tend to cause higher volatility in the market than domestic investors. Furthermore, Jo [5] found that foreign investors led the withdrawal from the market (net sellers), before the IMF financing program. However, after the IMF program, the situation reversed itself. Foreigners became primary net buyers. According to Hamao and Mei [6], there is no evidence that equity investment by foreigners increased the Japanese stock market volatility more than domestic investment during the Asian financial crisis. However, Jo [5] argued that as an emerging market, the Korean market was much more vulnerable to sudden capital flight than the firmly established Japanese market, one that avoided crisis. Choe et al. [7] contend that domestic investors have a strong home bias. Therefore, domestic investors overweight the domestic market in their portfolios. However, foreign investors usually have international expertise and talent, as well as considerable local resources. Moreover, Kho [8] argued that domestic investors did not have the advantage foreign investors had in KOSPI. Foreign investors performed better because they had international expertise with information sources and credible local information sources with no home bias, permitting them access to macroeconomic information for index options. However, their advantages were due to more advanced investment techniques and better corporate governance systems in their own countries. Moreover, foreign investors had much more difficulty accessing firm-specific information for KOSPI because of their physical and linguistic barriers. Sustainability 2019, 11, 1576 4 of 13

Joe and Oh [9] investigated the behavior of foreign investors in the Korean stock market after the 1997 Asian financial crisis (1999–2014). The authors analyzed the industrial distribution of foreign ownership. Joe and Oh [9] insisted that foreign investors showed a preference for large, profitable, highly liquid, and growth firms, as well as those with large boards. However, Chaebol (Korean conglomerates) firms were not attractive to foreign investors. In other words, foreign investors were not blindly purchasing Chaebol stocks (blue chips in KOSPI), and they considered many financial factors in stock purchase. In the end, the authors of Reference [9] insisted that foreign investors achieved success as financial investors in Korea. We also reviewed the literature regarding information asymmetry in the Korean stock market. We classified the literature into three categories: foreign investor information superiority, partial superiority and partial inferiority, and inferiority of foreign investor information relative to domestic investors.

3.1. Foreign Investor Information Superiority Ahn, Kang, and Ryu [10], Eom, Hahn, and Sohn [11], Hong and Shin [12], Ko and Kim [13], Ko and Lee [14], and Oh and Hahn [15] argued that foreign investors perform better than domestic investors due to their better expertise and talent. In other words, the superior performance of foreign investors primarily comes from their informational advantage in their asset allocation strategies and their tendency to buy prior to positive and sell prior to negative earnings surprises, while domestic investors do the opposite. Furthermore, according to Choe, Kho, and Stulz [7], if foreigners are more sophisticated, they might perform better in countries with open stock markets (large shares of foreign investors) but not in markets where native only trading is more prevalent.

3.2. Partial Superiority and Partial Inferiority Kang and Stulz [16] and Oh and Hahn [17]. Domestic investors are winners of intraday trading due to a short-lived informational advantage; however, global brokerages (foreign investors) are better at long-term position trading. Therefore, the combination of local information and global expertise can lead to higher proﬁt.

3.3. Foreigner Investor Information Inferiority Choe, Chung, and Lee (2008) [18], Choe, Kho, and Stulz [19], Kang, Lee, and Park [20], Kho and Kim [21], and Park, Bae, and Cho [22]. According to the articles reviewed, foreign money managers often buy at higher prices than domestic investors and sell at lower prices for medium and large trades due to foreign investor return-chasing behaviors in the Korean stock market. Foreign investors in KOSPI perform worse than domestic institutions and individuals because they pay the least amount of attention to temporary component-driven price changes (investors whose expectation changes serially correlates response to price change). All of the literature presented thus far mentions that foreign investors have longer investment horizons than domestic investors.

4. Empirical Results The buy and sell amount was collected from Samsung’s fnguide.com for foreign, institutional, and individual investor groups, along with the stock prices of the nine largest KOSPI enterprises and Samsung Electronics preference stocks by market capitalization. The research dated from 2 January 2007 through 30 December 2008. The ﬁrst date was chosen based on the sudden increase in spillover impact from the economies of the Southern European countries of Portugal, Italy, Greece, and Spain (PIGS) to the Korean ﬁnancial market. While evidence of the subprime mortgage crisis in the United States became public at that time, the magnitude of the problem was not appreciated until after the failure of Lehman Brothers, when expectations emerged that the crisis would spread to the emerging SustainabilitySustainability2019 2019, 11, 11, 1576, x FOR PEER REVIEW 5 of5 of 13 13

We used NBR (net buy ratio) to measure the investment patterns of different investor groups in marketthe Korean countries. Stock Koreans Exchange sank during into serious the global financial financial turmoil crisis. after The the NBR Lehman for an Bankruptcy investment until group the is endcalculated of 2008, soby wesubtracting set 30 December the sell 2008 amount as the from research the buy end date.amount and dividing by the total trade amount,We used which NBR is (netthe sum buy of ratio) the tobuy measure and sell the amount investments. (In addition, patterns ofsee different Song, Yang, investor & Oh groups [23].) The in theNBR Korean is defined Stock as: Exchange during the global financial crisis. The NBR for an investment group is calculated by subtracting the sell amount from the buy amount and dividing by the total trade amount, − which is the sum of the buy and= sell(Buy amounts. amount (In)t, i addition,(Sell amount see Song,)t, i Yang, & Oh [23].) The NBR is NBRt,i (1) defined as: (Buy amount)t, i + (Sell amount)t, i (Buy amount)t, i − (Sell amount)t, i NBR = (1) t,i (Buy amount)t, i + (Sell amount)t, i where the NBR is that of group i on day t. whereGrinblatt the NBR isand that Keloharju of group i[24]on dayandt .Griffin et al. [25] argued that the NBR could capture both directionsGrinblatt (buying and Keloharju and selling) [24 of] andinvestor Griffin trading et al. patterns [25] argued and their that relative the NBR magnitudes. could capture Therefore, both directionsthe NBR (buyingis appropriate and selling) for explaining of investor the trading inclination patterns of investors and their to relative buy and magnitudes. sell, rather Therefore, than using thethe NBR net isbuy appropriate amounts or for total explaining trading the amounts. inclination (NBR of > investors 0: the stock to buy buying and sell,of an rather investor than group. using NBR the net< 0: buy the amounts stock selling or total of an trading investor amounts. group) (NBR > 0: the stock buying of an investor group. NBR < 0: the stockAs sellingwe can of see an in investor the Figure group). 2, the Korean stock market experienced massive capital outflows duringAs we the can global see financial in the Figure crisis2 in, the 2008, Korean which stock led to market a severe experienced crunch until massive early 2009. capital Unlike outflows in 1997, duringthe Korean the global capital financial market remained crisis in 2008, in good which cond ledition to with a severe sound crunch corporate until performance early 2009.Unlike and ample in 1997,foreign the Koreancurrency capital reserves. market However, remained hot in money good conditionflowing into with Korean sound bond corporate and performancestock markets and had amplealready foreign reached currency 40 trillion reserves. won However, by the end hot of money 2010. flowing(See Financial into Korean Supervisory bond and Service stock marketsof Korea, hadReference already [26].) reached 40 trillion won by the end of 2010. (See Financial Supervisory Service of Korea, Reference [26].)

Figure 2. KOSPI index and NBR (Net Buy Ratio) for Samsung Electronics and Hyundai Motors. Figure 2. KOSPI index and NBR (Net Buy Ratio) for Samsung Electronics and Hyundai Motors. Next, we used conditional variance, employing Bollerslev’s [27] GARCH (generalized autoregressiveNext, we conditional used conditional heteroskedasticity) variance, modelemploying to measure Bollerslev’s the volatility [27] GARCH of each stock’s(generalized daily returns.autoregressive The reason conditional the GARCH heteroskedasticity) model was employed model in to this measure research the is duevolatility to its effectiveof each stock’s estimation, daily alleviatingreturns. The problems reason of the changing GARCH variance model (heteroscedasticity) was employed in ofthis ahigh research frequency is due time to seriesits effective with autocorrelation,estimation, alleviating particularly problems in ﬁnance. of changing Also, variance GARCH (heteroscedasticity) model’s parsimonious of a representationhigh frequency was time enoughseries towith consider autocorrelation, found ARCH particularly effects. in finance. Also, GARCH model’s parsimonious representation was enough to consider found ARCH effects. Conditional variance was derived from the weighted average of lagged squared residuals at time t from an appropriate model of each stock’s daily return. Sustainability 2019, 11, 1576 6 of 13

Conditional variance was derived from the weighted average of lagged squared residuals at time t from an appropriate model of each stock’s daily return.

p p γt = u + ∑ φiγt−i + ∑ δiεt−i + εt i=1 i=1 2 (2) εt|(εt−1 , εt−2,...... ) ∼ N(0, σt ) 2 2 2 σt = α0 + α1εt−1 + α2σt−1 where γt is each stock’s return represented as log first difference of each stock’s daily price, u is a drift term, and εt is the white-noise process. φi and δi are coefficients. ARMA (1,1) was chosen as the 2 2 model that best fits each stock’s returns. σt is a conditional variance, which is a function of εt−1 and 2 σt−1. α0 is an intercept term, α1 and α2 are coefficients. Thus, the conditional variance for stock market volatility was derived from estimated residuals by estimating the two equations above simultaneously; the conditional mean equation and the conditional variance equation. For an empirical model, we used the impulse response function (IRF) in a vector autoregression model (VAR). The VAR model can be expressed as follows:

3 B0Xt = β + ∑ BiXt−i + εt (3) i=1 where lags were selected by the Akaie Information Criteria (AIC) and the vector X included the tree variables. We used NBR for the investment group volatility of each stock’s daily returns (Volt), and each stock’s daily return (Returnt) (NBRt) (NBRt_For, NBRt_Inst, and NBRt_Ind indicates NBRt for foreign, institutional, and individual investment groups, respectively). B0 and Bi are matrices of coefficients, where β denotes intercept terms, and ε denotes the vector of serially and mutually uncorrelated structural innovations. In order to investigate the effect of the NBR for an investment group on the volatility of each stock’s daily returns, the impulse response function (IRF) was employed in this analysis. We carried out the empirical analysis for the global financial crisis period from 2 January 2007 to 30 December 2008. The IRF estimates the responses for current and future endogenous variables of a one-time shock on the variables in the VAR system. The IRF can be technically described in vector MA(∞) form as follows: Xt = µ + εt + Ψ1εt−1 + Ψ2εt−2 + Ψ3εt−3 . . . (4) where Xt is a vector containing the endogenous variables and µ is the mean of Xt. The matrix Ψs 0 can be expressed as ∂Xt+s/∂ε t = Ψs. The row i and column j element of Ψs indicate the impact of a one-unit increase in the jth variable’s innovation at date t(εj,t) on the ith variable at time t + s(Xi,t+s). 0 The coefficients sets ∂Xi,t+s/∂ε j,t, are the IRFs that show the response of Xi,t+s to a one-time impulse in Xj,t when all other variables are constant. As shown in Table1, according to the unit root test these variables are found to be stationary. Thus, we do not need to specify the first difference of the logarithm.

Table 1. Unit Root Tests ++.

Augmented Dickey-Fuller Test Statistic Variables Samsung Electronics Hyundai Motors

Volt −4.05 *** −3.42 ** Returnt −17.17 *** −22.88 *** NBRt_For −10.30 *** −11.75 *** NBRt_Inst −8.88 *** −13.44 *** NBRt_Ind −13.95 *** −12.82 *** ++ ** and *** indicate statistical signiﬁcance at 5 percent, and 1 percent, respectively. Trend and intercept are not included in the ADF equation. The ADF test is applied to the period from 2 January 2007 to 30 December 2008. Sustainability 2019, 11, x FOR PEER REVIEW 7 of 13

++ ** and *** indicate statistical significance at 5 percent, and 1 percent, respectively. Trend and Sustainabilityintercept2019 are, 11 not, 1576 included in the ADF equation. The ADF test is applied to the period from 2 January 7 of 13 2007 to 30 December 2008.

AccordingAccording to to the the results results of of this this analysis, analysis, the the case case of of Samsung Samsung Electronics Electronics and and Hyundai Hyundai Motor Motor revealedrevealed statistically statistically significant significant results results even even th thoughough seven seven of of the the other other enterprises enterprises and and Samsung Samsung ElectronicsElectronics preference preference stocks stocks did did not not have have statisti statisticallycally significant significant results. results. While While these these are just are two just companies,two companies, these theseresults results have have highly highly signific significantant meaning meaning because because the the two two enterprises enterprises form form approximatelyapproximately 25 25 percent percent of of total total KOSPI KOSPI market market capitalization capitalization (Samsung (Samsung Electronics: Electronics: 18.86% 18.86% and and HyundaiHyundai Motors: Motors: 5.23%) 5.23%) as as we we can can see see in in Figure Figure 33..

Figure 3. Relative Importance of Samsung Electronics and Hyundai Motors in KOSPI. Figure 3. Relative Importance of Samsung Electronics and Hyundai Motors in KOSPI. Figures4–9 show the results of the IRF. The variable NBR_SAM_FOR is NBR for foreign investors to SECFigures (Samsung 4–9 show Electronics), the results RETURN_SAM of the IRF. is The Samsung variable stock NBR_SAM_FOR return, VOL_SAM is NBR is Samsung for foreign stock investorsreturn’s volatility, to SEC (Samsung NBR_SAM_INST Electronics), is NBR RETURN_SAM for institutional is investors Samsung to SEC,stock NBR_SAM_IND return, VOL_SAM is NBR is Samsungfor individual stock investorsreturn’s tovolatility, SEC, NBR_HCAR_FOR NBR_SAM_INST is NBRis NBR for foreignfor institutional investors investors to HMC (Hyundaito SEC, NBR_SAM_INDMotors), and NBR_HCAR_INST is NBR for individual is NBR for investors institutional to SEC, investors NBR_HCAR_FOR to HMC. As indicated, is NBR in for the foreign Figures, ± investorsas the “response to HMC to (Hyundai Cholesky OneMotors), S.D. Innovationsand NBR_HC2AR_INST S.E.”, the is IRF NBR results for showinstitutional the response investors of X i,tot+s HMC.to a one As standard indicated, deviation in the Figures, impulse as of the error “respons term ine Xtoj, tCholeskyof Equation One (3), S.D. with Innovations two standard ±2 S.E.”, deviation the confidence interval (±2 S.E.). The impulse response period reflects short-term effects from one day IRF results show the response of Xi,t+s to a one standard deviation impulse of error term in Xj,t of Equationto 10 days, (3), which with two corresponds standard todeviation this paper’s confidence objectives interval because (±2 S.E.). financial The marketsimpulse response rolled heavily period in reflectsthe short-term short-term during effects the financialfrom one crisis. day to As 10 shown days, in which Figure corresponds1, when the impulseto this paper’s is NBR forobjectives foreign becauseinvestors financial to SEC, themarkets response rolled of theheavily SEC stockin the return’s short-term volatility during is significantly the financial positive crisis. As until shown the third in Figureperiod. 1, This when is the evidence impulse that is theNBR SEC for stock foreign market investors volatility to SEC, was the affected response by foreignof the SEC equity stock investment. return’s volatilityThat is, foreign is significantly investment positive significantly until the increased third period. the SEC This stock is evidence return’s volatility.that the SEC stock market volatilityFigures was4– 6affected display theby impulseforeign responseequity investment. of Samsung That Electronics is, foreign (SEC) stockinvestment return’s significantly volatility to increasedthe SEC stock the SEC return, stock NBR return’s for foreign volatility. investors to SEC, NBR for institutional investors to SEC, and NBRFigures for individual 4–6 display investors the impulse to SEC response during the of sample Samsung period Electronics 2 January (SEC) 2007 stock to 30 return’s December volatility 2008. to theAs SEC shown stock inreturn, Figure NBR4, when for foreign the impulse investors is NBR to SEC, for foreign NBR for investors institutional to SEC, investors the response to SEC, of and the NBRSEC for stock individual return’s investors volatility to was SEC significantly during the positivesample period up to the2 January third period. 2007 to This 30 December is evidence 2008. that the SECAs shown stock marketin Figure volatility 4, when was the affectedimpulse by is NBR foreign for equity foreign investment. investors to That SEC, is, the foreign response investment of the SECsignificantly stock return’s increased volatility the SEC was stock significantly return’s volatility.positive up to the third period. This is evidence that the SECFigure stock4 alsomarket shows volatility that when was affected the impulse by foreign was the equity SEC investment. stock return, That the is, response foreign investment of the NBR significantlyfor foreign investorsincreased to the SEC SEC was stock significantly return’s volatility. positive up to the third period. However, as shown in FiguresFigure5 4 and also6, shows when thethat impulsewhen the was impulse the SEC was stock the SEC return, stock the return, response the of response NBR for of domestic the NBR forinvestors foreign to investors SEC was to significantly SEC was significantly negative. This positi isve evidence up to the of feedbackthird period. trading However, behavior as byshown foreign in Figuresinvestors 5 toand SEC 6, stock.when the impulse was the SEC stock return, the response of NBR for domestic Sustainability 2019, 11, x FOR PEER REVIEW 8 of 13

investors to SEC was significantly negative. This is evidence of feedback trading behavior by foreign Sustainabilityinvestors to2019 SEC, 11 ,stock. 1576 8 of 13 Furthermore, Figure 6 indicates that when the impulse is the SEC stock return, the SEC stock return’sFurthermore, volatility Figureshows 6a indicates significant that response, when the wi impulseth a negative is the SECsign. stock This return,result means the SEC there stock is return’svolatility volatility asymmetry. shows That a significant is, the SEC response, stock return’s with a negative volatility sign. is hi Thisgher result when means the SEC there stock is volatility return asymmetry.declines. That is, the SEC stock return’s volatility is higher when the SEC stock return declines. FiguresFigures7 7––99 show show thethe impulseimpulse responseresponse ofof HMCHMC stockstock return’sreturn’s volatilityvolatility toto HMCHMC stockstock return,return, NBRNBR forfor foreignforeign investorsinvestors toto HMC,HMC, NBRNBR forfor institutionalinstitutional investorsinvestors toto HMC,HMC, andand NBRNBR forfor individualindividual investorsinvestors toto HMCHMC duringduring thethe globalglobal financialfinancial crisiscrisis period.period. AccordingAccording to FigureFigure7 7,, when when thethe impulseimpulse isis NBR NBR forfor foreign foreign investors investors toto HMC,HMC, thethe responseresponse ofof HMCHMC stockstock return’sreturn’s volatilityvolatility isis significantlysignificantly positive,positive, upup toto thethe sixthsixth period.period. This isis evidenceevidence thatthat foreignforeign equityequity investmentinvestment significantlysignificantly increasedincreased HMCHMC stockstock return’sreturn’s volatility.volatility. InIn addition,addition, Figures Figures7– 79 –indicates9 indicates that that when when the impulsethe impulse is HMC is HMC stock return,stock return, HMC’s HMC’s stock return stock volatilityreturn volatility shows ashows significantly a significantly negative negative response, response, whichis which evidence is evidence of volatility of volatility asymmetry. asymmetry. That is, HMCThat is, stock HMC return’s stock return’s volatility volatility is higher is when higher the when HMC the stock HMC return stock declines. return declines.

Figure 4. IRF results for foreign investment groups to Samsung Electronics. Figure 4. IRF results for foreign investment groups to Samsung Electronics. Sustainability 2019, 11, x FOR PEER REVIEW 9 of 13

Sustainability 2019 11 Sustainability 2019,, 11,, 1576x FOR PEER REVIEW 99 ofof 1313

Figure 5. IRF results for institutional investment groups to Samsung Electronics. Figure 5. IRF results for institutional investment groups to Samsung Electronics. Figure 5. IRF results for institutional investment groups to Samsung Electronics.

Figure 6. IRF results for individual investment groups to Samsung Electronics. Figure 6. IRF results for individual investment groups to Samsung Electronics.

Figure 6. IRF results for individual investment groups to Samsung Electronics. Sustainability 2019, 11, x FOR PEER REVIEW 10 of 13

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Figure 7. IRF results for foreign investment groups to Hyundai Motors. Figure 7. IRF results for foreign investment groups to Hyundai Motors. Figure 7. IRF results for foreign investment groups to Hyundai Motors.

Figure 8. IRF results for institutional investment groups to Hyundai Motors. Figure 8. IRF results for institutional investment groups to Hyundai Motors.

Figure 8. IRF results for institutional investment groups to Hyundai Motors. Sustainability 2019, 11, 1576 11 of 13 Sustainability 2019, 11, x FOR PEER REVIEW 11 of 13

Figure 9. IRF results for individual investmentinvestment groupsgroups toto HyundaiHyundai Motors.Motors.

5. Conclusions We reviewedreviewed major major studies studies in financein finance literature literat accumulatedure accumulated over the over last twothe decadeslast two regarding decades theregarding impact the and impact roles and of foreign roles of portfolio foreign portfolio investors investors in Korea. in ThisKorea. research This research will contribute will contribute to the literatureto the literature by organizing by organizing previous previous studies studies in Korea, in Korea, making making them verifiablethem verifiable and comparable and comparable to each to other,each other, and eventually and eventually narrowing narrowing the gap the between gap betw theeen research the research performed performed at the firm at the level firm and level research and performedresearch performed primarily primarily at the state at levelthe state in Korea. level in Korea. This paper examined examined the the effects effects of of equity equity investment investment by by foreign foreign investors investors on onthe the volatility volatility of the of thenine nine largest largest KOSPI KOSPI market market capitalization capitalization enterprises’ enterprises’ stock stock pric pricee during during the the global global financial financial crisis. crisis. TheThe resultsresults indicateindicate thatthat itit isis meaningfulmeaningful toto distinguishdistinguish betweenbetween portfolioportfolio investmentinvestment by foreignforeign investorsinvestors andand investmentinvestment byby residents.residents. InIn Korea,Korea, individualindividual investors investors are are jokingly jokingly called called “ant “ant warriors” warriors” because because they they face face a slim a slim chance chance of hittingof hitting a jackpot a jackpot due todue their to lacktheir of lack information of information and ability and to ability analyze to it.analyze The investments it. The investments of individual of investorsindividual were investors short were term short and they term tended and they to selltended stocks to sell right stocks after right making after a smallmaking profit, a small while profit, the institutionalwhile the institutional and foreign and investors foreign pickedinvestors up picked blue-chip up stocksblue-chip sold stocks by individuals. sold by individuals. When the When stock marketthe stock recovered, market recovered, individual investorsindividual who investors sold their wh stockso sold returned, their stocks buying returned, shares buying at relatively shares high at prices.relatively The high return prices. of individuals The return raised of individuals stock prices raised further, stock causing prices institutionalfurther, causing and foreigninstitutional investors and toforeign sell their investors shares. to Then, sell their the stock shares. prices Then, plunged the stock again, prices seriously plunged affecting again, individual seriously investors.affecting Accordingindividual toinvestors. the statistical According results presentedto the statistical in this paper,results the presented SEC stock in return’s this paper, volatility the wasSEC higher stock whenreturn’s the volatility SEC stock was returns higher of when individual the SEC investment stock returns groups of individual declined. investment groups declined. InIn thethe Korean Korean stock stock market, market, one one of theof mostthe most important important roles ofroles institutional of institutional investors investors is to prevent is to capitalprevent flight capital or suddenflight or stopssudden caused stops by caused speculative by speculative attacks by attacks foreign by hedge foreign funds hedge during funds a financialduring a crisis.financial In thiscrisis. paper, In this we paper, show we that show individual that individual investors investors bought stocks bought fervently stocks whenfervently the when volatility the ofvolatility SEC stock of SEC return stock increased. return increased. We present We strong present evidence strong evidence of positive of positive feedback feedback trading bytrading foreign by investorsforeign investors and negative and negative feedback feedback trading by trading domestic by investorsdomestic (institutional investors (institutional and individual and investmentindividual groups)investment in the groups) case of in SEC the stockscase of duringSEC stocks the global during financial the global crisis. financial crisis. Overall, we found some evidence that during the global financial crisis, foreign equity investment significantly affected the stock return’s volatility of South Korea’s two main companies, Samsung Electronics and Hyundai Motors. We also found that the stock return’s volatility concerning Sustainability 2019, 11, 1576 12 of 13

Overall, we found some evidence that during the global ﬁnancial crisis, foreign equity investment signiﬁcantly affected the stock return’s volatility of South Korea’s two main companies, Samsung Electronics and Hyundai Motors. We also found that the stock return’s volatility concerning these two main companies was higher when the stock return declined. Consequently, we found that equity investment by foreigners in the Korean stock market tended to increase market volatility levels more than investment by residents during the research term.

Author Contributions: Conceptualization, Y.K.; methodology, G.-J.J.; software, G.-J.J.; validation, Y.K. and G.-J.J.; formal analysis, G.-J.J.; investigation, Y.K.; resources, Y.K.; data curation, Y.K.; writing—original draft preparation, Y.K.; writing—review and editing, Y.K. and G.-J.J.; visualization, Y.K. and G.-J.J.; supervision, Y.K. and G.-J.J.; project administration, Y.K.; funding acquisition, Y.K., please turn to the CRediT taxonomy for the term explanation. Authorship must be limited to those who have contributed substantially to the work reported. Funding: This research was funded by Keimyung University, grant number 20160490” and “The APC was funded by Keimyung University”. Acknowledgments: This research was supported by the Keimyung University Research Grant of 2016. Conﬂicts of Interest: The authors declare no conﬂict of interest. The funders had no role in the design of the study; in the collection, analyses, or interpretation of data; in the writing of the manuscript, or in the decision to publish the results.

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