Abstract

We study the effect of product market competition(hereafter competition) on foreign equity ownership. Competition plays the role of corporate governance mechanism through the market discipline effect. If foreign investors prefer market discipline effect to profitability, the competition would be positively related with foreign equity ownership. If foreign investors consider firms’ profitability as more important aspect, then the competition would be negatively related with foreign equity ownership. In this respect, we examine a null hypothesis that competition is not related with foreign equity ownership. The competition is measured by Herfindahl－Herschman Index(multiplied by －1). The empirical test employs multiple regression. The dependant variable is foreign equity ownership. The independent variable is competition index. The regression includes control variables reported in previous researches. Sample firm－years from 2002 through 2010 were used in the analysis. The regression coefficient for the competition shows statistically significant negative sign. The results suggest that high competition decreases foreign equity ownership. Thus foreign investors appear to prefer profitability to market discipline effect. The results of this study contribute to the relevant literature by introducing a variable outside of firms in addition to firm characteristic variables. The results of this study may help policy makers better understand how the competition affects foreign equity ownership.

Keywords

• Foreign Equity Ownership
• Product Market Competition
• Profitability
• Market Discipline Effect

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