Do Foreign Investors Stabilize Firm-Specific Risk? Evidence from Korea

This paper examines whether foreign investors affect firm-specific risk using data on firms listed on the Korea Exchange (KRX). We provide empirical evidence of a negative relationship between foreign ownership (FO) and firm-specific risk. This negative relation remains robust after addressing endogeneity and selection concerns through 2SLS, PSM, and Heckman tests. The risk-reduction effect is primarily driven by mispricing correction, which is consistent with the noise trading channel. However, we do not find strong evidence that foreign investors’ monitoring mitigates firm-specific risk. Our findings suggest that foreign investors can play a stabilizing role through the pricing channel, particularly by curbing noise trading risk.