Disclosure Effect of Foreign Direct Divestment: Evidence from Korean Firms’ Divestment from the Chinese Market

Abstract

Background: This study aims to examine the disclosure effect of Korean firms’ foreign direct divestment (FDD) from the Chinese market. While many Korean firms invest in China, there is almost no research targeting China on its own. Hence, this study is important in that it analyzes FDD, which has not been studied in detail previously owing to a lack of data. Methods: We examine 77 samples of Korean firms’ disclosures on foreign divestment from China from January 2007 to December 2016 to determine their effects on the firm value of the parent companies based on the event studies and cross-sectional regression analyses. Results: We find negative effects on the parent firm value in the short term and mid-term. Furthermore, we examine the differences in the disclosure effects in the KOSPI and KOSDAQ stock markets of Korea. Both markets show negative correlations between the foreign divestment from China and firm value. The KOSPI (KOSDAQ) market shows negative average abnormal returns from the day of (one day after) the disclosure, and negative cumulative average abnormal returns in the mid-term (short term) after the disclosure. Thus, the KOSPI market shows stronger disclosure effects than the KOSDAQ market does. Conclusion: Because most of Korean firms investing in China belong to the manufacturing businesses, the manufacturing facilities of foreign subsidiary companies are considered as important assets. Accordingly, divestment from China signifies the loss of important manufacturing bases and assets and the disclosure on foreign divestment by Korean firms has negative correlation with firm values.