The Relationship between the Greenhouse Gas and Energy Target Management System and Foreign Ownership: Investor Sensitivity to the Implementation of the System

Abstract

As the issue of climate change intensifies, the international community has been actively formulating strategies for mitigation and adaptation. With developed countries leading the way in enforcing stricter greenhouse gas emission regulations, the risks and opportunities associated with climate change have become critical factors in both domestic and international competitive markets. This study examines the investment preferences of foreign investors in companies managed under the Greenhouse Gas and Energy Target Management System (TMS) from 2010 to 2022. Furthermore, it delves into the sensitivity of these investors to the extent of each company’s adherence to the TMS, analyzing this responsiveness in terms of information asymmetry and corporate life cycle. Utilizing a sample of 19,826 firm-year observations from companies listed on the Korea Composite Stock Price Index (KOSPI) and the Korea Securities Dealers Automated Quotations (KOSDAQ) markets, this study’s regression analysis reveals several key findings. Firstly, foreign investors show a preference for investing in companies managed under the TMS compared to those not involved in this system. Secondly, high information asymmetry in the context of TMS implementation negatively impacts foreign investors’ preferences. Thirdly, among TMS-managed companies, foreign investors tend to favor those in the maturity stage of their life cycle. These results suggest that foreign investors perceive the systematic implementation of carbon reduction targets under a government-led TMS as an indicator of a company’s environmental management efficiency, influencing their investment decisions.

1. Introduction

In response to the escalating challenges posed by climate change, the international community has increasingly focused on developing strategies for both mitigation and adaptation. These efforts, spearheaded primarily by advanced economies, have led to more stringent greenhouse gas emission regulations, significantly impacting the internal and external business operations and competitiveness of firms globally. Amidst these evolving regulatory and competitive landscapes, proactive responses from domestic companies have become crucial.

Particularly in South Korea, the Greenhouse Gas and Energy Target Management System (TMS) has seen a marked increase in participation, growing from 391 companies in 2011 to 825 in 2014. The recent inclusion of 584 companies in a new emissions trading scheme further highlights the significance of TMS participant companies, which account for approximately 60% of national greenhouse gas emissions. Understanding their responses to climate change is thus increasingly critical.

Despite the mounting environmental regulatory pressures, the need for adaptation to mitigate the damages caused by climate change has also gained prominence. The UK’s Climate Impacts Programme (2003) defines climate change adaptation as the adjustment of natural and social systems in response to climate change impacts, transforming climate risks into business opportunities [1].

Globally, various assessment frameworks have been developed to survey national and corporate responses to climate change and to promote greenhouse gas reduction. Indices like the Climate Change Performance Index and the Climate Vulnerability Monitor, along with the UN’s Carbon Disclosure Project, are driving transparency and comparative analysis in environmental performance.

Given the growing recognition of climate change as both a risk and an opportunity for businesses, this study aims to analyze whether foreign investors exhibit a preference for investing in companies managed under the TMS compared to those that are not. In an era where foreign investment in domestic companies is on the rise, such preferences could influence environmental policy decisions.

The shift towards sustainable and responsible investment (SRI) activities in developed countries is enhancing corporate sustainability and yielding long-term investment returns. Foreign investors, recognizing the importance of non-financial information like a company’s response to environmental challenges in risk management, have been early adopters of this approach. A report by PwC indicates that foreign institutional investors are showing a keen interest in the broader spectrum of Environmental, Social, and Governance (ESG) criteria. This shift highlights a growing trend among international investors toward prioritizing sustainability and corporate responsibility in their investment decisions. The report suggests that companies with strong ESG practices are increasingly attractive to these investors, as they are seen to mitigate risk and potentially deliver long-term value.

With the international community emphasizing and encouraging SRI activities, and domestic institutional investors increasingly participating, a trend emerges. Institutional investors are strategizing to exclude companies with poor social and environmental issue management—those with high non-financial risks—from their portfolios, as elucidated by Cox et al. (2004) [2]. This study explores these dynamics, focusing on the intersection of foreign investment, corporate environmental policy, and the evolving landscape of global and domestic responses to climate change.

Furthermore, this research delves into the concept of investment sensitivity, examining how varying degrees of information asymmetry and corporate maturity influence foreign investors’ decisions. This deeper analysis provides valuable insights into the criteria that guide foreign investment, particularly in an era where environmental considerations are becoming increasingly paramount in the global market.

In essence, this study extends the discourse on the interplay between foreign investment and corporate environmental strategies. It uncovers layers of investor behavior and preferences, offering a comprehensive understanding of how foreign investors navigate the complexities of environmental management and corporate governance. This research not only contributes to academic discussions on sustainable investment but also provides practical implications for companies looking to attract foreign investment while pursuing environmental objectives.

This paper unfolds as follows: Section 2 reviews the existing literature and sets forth hypotheses. Section 3 describes the research design and methodology, including sample selection. Section 4 presents and interprets the findings, focusing on foreign investors’ preferences within the Target Management System. The final section, Section 5, concludes the paper by summarizing the key insights and suggesting directions for future research.

2. Prior Research and Hypothesis Development

2.1. Greenhouse Gas and Energy Target Management System and Related Prior Studies

As the world grapples with increasingly severe abnormal weather conditions due to global warming, a myriad of initiatives are being proposed to combat climate change. The international discourse on climate change first gained prominence at the inaugural World Climate Conference in Switzerland in 1979. This pivotal event marked a transition in viewing climate change as a collaborative international endeavor rather than an isolated national issue. Consequently, nations globally have acknowledged the need for collective action and cooperation.

Central to the climate change discussion is global warming, predominantly attributed to excessive carbon dioxide emissions. It is widely recognized that minimizing greenhouse gas emissions should be a primary focus. A key strategy emerging in this context is the carbon emissions trading system, which functions autonomously through market mechanisms.

In South Korea, under the previous administration’s philosophy of low carbon, green growth, a target was set in November 2009 to reduce greenhouse gas emissions by 30% from the expected Business as Usual (BAU) levels by 2020. To achieve this effectively, various systems for reducing greenhouse gases were established. Prior to the implementation of the emissions trading system, the Korean government introduced the Greenhouse Gas and Energy Target Management System. This system mandates specific greenhouse gas and energy consumption targets for significant emitting industries and enforces compliance.

The Target Management System imposes standards and obligations on high-emitting companies to set, manage, and achieve reduction targets formulated in the preceding year. The government collaborates with these companies in setting these targets and offers incentives for compliance, while non-compliance may result in corrective directives and penalties. The applicability of this system is determined based on a company’s average greenhouse gas emissions and energy consumption over the past three years. As of 2012, 458 companies were designated under this system, accounting for about two-thirds of the national greenhouse gas emissions.

The sectors involved include 366 industrial entities like power generation and manufacturing, 45 in the building sector such as universities and hospitals, 21 in waste management like incineration and wastewater treatment, and 26 in agriculture and livestock. The Target Management System not only plays a crucial role in reducing emissions through set targets but also prepares domestic companies for the future emissions trading system by enhancing their greenhouse gas management capabilities. The greenhouse gas calculation, reporting, and verification system used in the Target Management System is expected to be instrumental in the emissions trading system, ensuring the reliability and accuracy of reported greenhouse gas emissions and reductions.

Recent research, both domestically and internationally, consistently indicates that green policies, environmental improvements, and the disclosure thereof positively influence corporate profitability. This body of work suggests a notable causal link between a firm’s carbon emissions, its disclosure of carbon reduction policies, and corporate valuation. This linkage stems not only from consumer preference for products from low-emission companies, which aligns with their carbon reduction awareness, but also from the positive reputational signal sent to investors by corporate executives through these environmental efforts [3].

Chapple et al. (2013) examined market reactions to carbon emissions among 58 Australian companies engaged in voluntary emissions disclosure and involved in public carbon trading. Their event study revealed a significant market response to ETS (Emission Trading System)-related events, particularly in high-emission companies, suggesting a robust positive correlation between carbon emissions levels and stock prices via valuation models [4]. Matsumura et al. (2014) expanded this inquiry to S&P 500 companies in the U.S., addressing potential biases in Chapple et al.’s sample. Their findings confirmed a significant inverse correlation between carbon emissions and corporate value, even after adjusting for self-selection bias. Notably, firms that voluntarily disclosed carbon emission information had higher market value than those that did not [5].

Jung et al. (2016) explored the causal relationship between carbon emissions risk exposure and debt costs in 78 Australian Stock Exchange-listed companies from 2009 to 2013. Their analysis indicated a positive correlation between debt costs and carbon emission risks in non-CDP-compliant companies, suggesting that carbon emissions can escalate potential corporate debt and diminish corporate value [6].

Clarkson et al. (2015) investigated the interplay between greenhouse gas emissions and corporate value in EU companies under the carbon emissions trading system. Their empirical analysis found no direct correlation between a company’s carbon emissions allowance and its value. However, a negative relationship with corporate value emerged when the carbon emission allowance was insufficient, particularly for companies with higher emissions within their industry or those in less competitive sectors [7].

Saka and Oshika (2014) reported differing outcomes for Japanese firms. Analyzing data from 89 companies that responded to CDP surveys, 16 non-respondents, and 989 non-participants from 2006 to 2008, they observed a significant negative correlation between carbon emissions levels and corporate value. However, voluntary disclosure of carbon emissions information positively impacted corporate value, especially for larger emitters [8].

In Korean studies, Jeong Yong-gi and Kim Seon-hwa (2008) emphasized environmental investments, including low-carbon policies, as crucial for corporate social responsibility (CSR). However, they noted a prevailing investor perception of such investments as mere additional costs, leading to hesitancy among managers to undertake environmental initiatives without clear financial gains. Their empirical analysis of companies in environmentally damaging industries revealed that environmental facility investments significantly reduced total manufacturing costs, particularly evident from the first to the third year post-investment [9].

Kim Myeong-seo et al. (2010) argued for the necessity of responding to growing demands for environmental information disclosure, influenced by global trends and stakeholder expectations. Their analysis demonstrated that environmental costs and investments significantly impacted corporate valuation in the capital market [10]. In a similar vein, they investigated how environmental investments and management costs are reflected in market valuations, focusing on companies designated as environmentally friendly by the Ministry of Environment. Their findings indicated that environmental costs and investments were statistically significant, suggesting these factors enhance corporate environmental performance, alter risk perceptions, and reduce capital costs, ultimately boosting corporate value.

2.2. Prior Research on Foreign Ownership

Foreign investors have increasingly exerted a significant influence in financial markets, particularly through their ability to discern and extract the intrinsic value of companies through sophisticated investment techniques, thereby setting a benchmark for the entire market, as identified by [11]. This phenomenon suggests that managers in companies with substantial foreign equity participation are presented with unique opportunities to align their strategies with the interests and preferences of these foreign investors.

Moon-tae Kim (2004) conducted an empirical analysis to explore the impact of foreign equity participation on earnings management within domestic companies [11]. This study compared companies with more than 15% foreign ownership (FC) to those exclusively owned by domestic investors (KC). The findings revealed that FCs had a significantly lower average in both the absolute and actual values of the accrual variable measuring earnings management compared to KCs. This indicates a discernible difference in earnings management practices between the two groups, with FCs engaging in less earnings management than KCs.

Additionally, the direction of earnings management, whether it involves an upward or downward adjustment of profits, has emerged as a critical area of research in the context of foreign investor influence. Moon-tae Kim (2004) analyzed the explanatory power of the accrual variable’s own figures in relation to this aspect [11]. The analysis showed a significantly negative correlation between the coefficients of the occurrence variable and the foreign ownership ratio, suggesting a potential dampening effect on managers’ intentions to adjust profits in either direction due to foreign investor influence.

Park Gyeong-hwan (2008) conducted a study focusing on foreign companies’ investment preferences and considerations in South Korea, examining 13 investment incentives and 9 environmental factors through interviews [12]. The investment considerations for foreign investors were categorized into market entry, investment type, establishment type, industry, size of investment, workforce size, and year of investment, analyzed using a t-test. The results indicated that foreign investors base their investment decisions on factors such as the market entered, type and establishment of investment, workforce size, and year of investment. These findings highlight the need for the Korean government to tailor investment incentives and create conducive environmental factors to attract high-quality foreign investors.

Baek Jeong-han and Kwak Young-min (2018) investigated whether foreign investors show a preference for Korean companies that offer information highly comparable to foreign companies and whether the qualitative attributes of accounting information serve as an incentive for foreign investment [13]. Analyzing a sample of 1817 companies listed on the Korean stock market from 2011 to 2015, it was found that foreign investors tend to prefer Korean companies with higher comparability to foreign firms. Furthermore, the relationship between comparability and foreign ownership strengthened post-IFRS introduction, indicating that the adoption of IFRS, which brought about international accounting consistency, has had a positive impact on attracting foreign investors by addressing undervaluation in the international capital market.

Since the liberalization of investment regulations in July 1998, allowing foreign investment in all types of securities in the country, foreign investors, as of December 2020, hold assets valued at KRW 760 trillion. This figure represents 31.4% of the market capitalization of companies listed on the stock market and KOSDAQ. Examining previous research, it is observed that foreign investors in Korea display a marked preference for companies with reduced information asymmetry [14]. They tend to invest in firms characterized by transparent corporate disclosures and a stable financial and management environment [15]. Although concerns persist in some circles about the potential negative impact of foreign investors on the domestic capital market and corporations, such as short-term profit realization and corporate capital recovery via high dividends and capital reduction, the majority of studies suggest otherwise. Research predominantly indicates that foreign investors contribute positively, such as by stabilizing management with long-term capital and transferring advanced management techniques [16,17].

Furthermore, in companies with strategic investors holding more than 5% of the shares, the proportion of foreign investors appears to have no significant influence on short-term dividend increases [16,18]. Particularly noteworthy is the trend of foreign investors often participating as major shareholders or blockholders in institutional forms, rather than as individual or minority shareholders. As such, their investment approach is characterized by promoting stable values in the invested companies and a strong motivation for participation in corporate management, indicating a focus on long-term gains rather than short-term profits [19]. Additionally, with the growing trend of socially responsible investment (SRI), which seeks to balance profit maximization with stability in the global capital market, global management firms are increasingly motivated to invest in companies that demonstrate sustainable growth and handle environmental information conscientiously [20].

2.3. Hypothesis Development

Investigating the influence of foreign investors in corporate environmental initiatives, particularly in low-carbon and energy reduction efforts, uncovers a multifaceted relationship. Foreign investors, as advanced institutional investors, are increasingly recognized for their role in extracting intrinsic company value through sophisticated investment techniques and disseminating this information to the wider market. This dynamic not only sets market benchmarks but also provides domestic investors with novel investment paradigms, as noted by Moon-tae Kim (2004) [11].

Their propensity to influence market trends is significant, especially considering the tendency of general investors in domestic markets to exhibit herding behavior that often aligns with foreign investment patterns. Consequently, management in companies with substantial foreign equity participation cannot remain indifferent to the preferences and influences of these international investors.

The preference of foreign investors for companies engaged in low-carbon policies becomes a compelling area of study. Previous research in developed countries, particularly those with strong commitments to climate agreements, has shown mixed results regarding the relationship between environmental performance and corporate value. Porter and van der Linder (1995) highlighted that proactive environmental performance could enhance corporate value by eliminating environmental waste and inefficiencies [21]. On the other hand, Heal (2005) posited that good environmental performance, as an aspect of corporate social responsibility (CSR), plays a crucial role in bridging the gap between the country and the market, mitigating risks from social conflicts, reducing pollution, and enhancing brand value, thereby potentially improving long-term financial performance [22].

In the Japanese context, where the mandatory disclosure of greenhouse gases has been legislated since 1998, Saka and Oshika (2014) investigated the relationship between corporate value and environmental performance. Their analysis of responses to the Carbon Disclosure Project (CDP) survey from 2006 to 2008 showed a significant inverse relationship between carbon emissions and corporate value [8]. Conversely, Vance (1975) cautioned that striving for excellent environmental performance might negatively impact corporate value due to internal resource allocation [23]. Similarly, Barnea and Rubin (2010) questioned whether CSR spending, as opposed to direct profit-generating activities, could lead to opportunity costs and the potential misuse of corporate resources at the managerial level for personal reputation [24].

Despite these varied perspectives, the growing global emphasis on environmental factors due to climate change has spurred studies using carbon emission levels as a proxy for environmental performance. These studies generally indicate that better environmental performance (i.e., lower carbon emissions) correlates with higher corporate value [4,5,8,25,26,27,28,29].

In light of this evidence, it becomes increasingly clear that foreign investors may indeed have a growing preference for investing in companies actively engaged in environmental issues, particularly those implementing low-carbon and energy-efficient strategies. This trend reflects a broader shift in investment priorities, where environmental stewardship is becoming an integral component of corporate valuation and investor decision-making processes.

While previous studies have established that disclosure or investment in carbon information positively impacts corporate value, a new dimension emerges when considering companies under government-mandated Greenhouse Gas and Energy Target Management Systems. Firms designated as target-managed by government agencies are systematically overseen, with specific goals for carbon emission reduction, allocated quotas, and subsequent facility investments or carbon credit purchases. These elements provide these companies with strong incentives to implement carbon-neutral policies as part of achieving their reduction targets.

This scenario presents an intriguing investment landscape. Companies engaged in government target management programs potentially possess a higher investment appeal compared to their non-participating counterparts. The systematic approach to carbon management under these programs—spanning from setting reduction targets to enforcing compliance through investment or carbon trading—signals a proactive stance on environmental responsibility. Foreign investors, increasingly attuned to the long-term risks and opportunities associated with climate change and sustainability, may find these companies more attractive. This attractiveness stems not only from their alignment with evolving regulatory landscapes but also from their potential to lead in efficiency, innovation, and sustainable practices.

Moreover, the government’s role in Target Management System suggests a level of oversight and commitment to environmental goals that can translate into a competitive advantage for these companies. Through structured frameworks for emission reduction and encouraged investment in sustainable technologies, these firms are often at the forefront of adopting practices that not only comply with but exceed environmental standards. Such leadership can translate into enhanced corporate reputation, operational efficiencies, and ultimately, an increase in corporate value.

In summary, the intersection of government Target Management System and corporate environmental strategy opens up new avenues for understanding corporate value in the context of environmental sustainability. Firms under a Target Management System, with their structured approach to meeting carbon-neutral goals, present a compelling incentive for enhanced investment appeal in an increasingly environmentally conscious market. Based on the aforementioned arguments, the first hypothesis is as follows.

Hypothesis 1.

Foreign investors are more likely to favor investment in companies that are actively engaged and regulated under Greenhouse Gas and Energy Target Management Systems, in contrast to those companies that are not bound by such regulatory frameworks.

In the framework outlined by the National Greenhouse Gas Comprehensive Management System, the process for promoting the Target Management System involves sector-specific management agencies designating companies, subject to confirmation by the Ministry of Environment—the overseeing body. These designated companies are tasked with annually monitoring their greenhouse gas emissions and the status of emission facilities and subsequently submitting detailed reports to the respective sector’s managing agency. Following a review of these submissions, the management agency sets and communicates the greenhouse gas reduction targets and objectives for the ensuing year to each company. In response, these companies are required to formulate and submit a plan by December, detailing how they intend to achieve these set goals.

In alignment with the approved plans, each company undertakes initiatives to meet its greenhouse gas reduction and energy conservation targets. The data pertaining to greenhouse gases, calculated during this process, are reported to the Greenhouse Gas Comprehensive Information Center, supervised by the Ministry of Environment. Should a sector’s management agency identify any shortfall in a company’s performance against the targets or find deficiencies in the reporting, it issues an order for improvement. Such orders can negatively impact the company’s reputation capital. Given that the evaluators and the goal-executing entities are distinct, and the implementation process of the system involves multiple stages, the effective execution of the Target Management System is contingent upon efficient communication across these stages and the quality and quantity of information generated by the companies.

Previous research indicates that foreign investors typically favor companies with lower levels of information asymmetry, seeking to minimize transaction costs and uncertainties associated with information gaps [30,31]. This preference is particularly pronounced when investing in foreign companies, where information asymmetry concerning non-financial data is exacerbated by the institutional diversity of the target company’s country and market. From this viewpoint, this study hypothesizes that the intricate reporting system of companies under the Target Management System might be perceived as a form of institutional heterogeneity by foreign investors. This perception could contribute to information asymmetry, regardless of the system’s faithful execution, thus influencing foreign investors’ sensitivity to investment in these companies. Consequently, the following hypothesis is proposed.

Hypothesis 2a.

The degree of foreign investors’ ownership in companies governed by the Target Management System is likely to fluctuate based on the extent of information asymmetry present.

Hypothesis 2b posits that the stage of a company’s life cycle—whether it is in a growth or maturity stage—significantly impacts investor sensitivity to the implementation of the Target Management System. This study posits that the life cycle of a company significantly influences its proficiency in managing greenhouse gas emissions under the Target Management System. Specifically, the comparison is drawn between companies in the growth phase and those in the maturity stage, with a particular emphasis on their capabilities in greenhouse gas emission management, as well as their efficiency in operating systems for greenhouse gas monitoring, reporting, and verification.

Companies in the maturity stage are hypothesized to exhibit superior management capabilities and know-how in controlling greenhouse gas emissions. This proficiency is attributed to their extensive experience and established processes in dealing with the intricacies of the Target Management System, including the robust estimation, reporting, and verification of greenhouse gas emissions. These mature companies, having navigated the system for a longer duration, are likely to demonstrate exceptional efficiency and effectiveness in this regard.

In contrast, companies in the growth stage are presumed to have relatively less efficiency in managing greenhouse gas emissions within the Target Management System. This is not due to a lack of commitment but rather reflects their nascent stage in engaging with the system’s requirements and processes. These growing companies are still in the process of developing their capabilities and understanding of the system, which might result in less efficiency compared to their mature counterparts.

Consequently, this study suggests that the life cycle stage of a company is a crucial determinant in assessing its effectiveness and efficiency within the Target Management System for greenhouse gas emissions. This distinction, in turn, could influence the investment preferences of foreign investors, who may view the institutional effectiveness of mature companies as a more attractive and stable investment compared to the evolving capabilities of growing firms. This leads to the final hypothesis, as follows.

Hypothesis 2b.

The correlation between foreign investors’ ownership in companies under the Target Management System and their respective investment decisions will be influenced significantly by the stage of the company’s life cycle.

3. Research Design

3.1. Research Model and Measurements of Variables

To ascertain whether foreign investors exhibit a preference for investing in companies regulated under a Target Management System as opposed to those not governed by such a system, the following model has been established.

$$\begin{array}{l}FO{R}_{i,t}={\alpha }_0+{\beta }_{1}TM{S}_{i,t}+{\beta }_{2}SIZ{E}_{i,t}+{\beta }_{3}OC{F}_{i,t}+{\beta }_{4}LE{V}_{i,t}+{\beta }_{5}MT{B}_{i,t}+{\beta }_{6}RO{A}_{i,t}+{\beta }_{7}TUR{N}_{i,t}+{\beta }_{8}BET{A}_{i,t}\\ +{\beta }_{9}DI{V}_{i,t}+IN{D}_i+Y{R}_t+{\epsilon }_t\end{array}$$

(1)

where ${\mathrm{FOR}}_{i,t}$ = foreign investors’ ownership; ${\mathrm{TMS}}_{i,t}$ = Target Management System management company; ${\mathrm{SIZE}}_{i,t}$ = Ln (total assets); ${\mathrm{OCF}}_{i,t}$ = operating cash flow/total asset; ${\mathrm{LEV}}_{i,t}$ = total debt/total asset; ${\mathrm{MTB}}_{i,t}$ = market value of equity/book value of equity; ${\mathrm{ROA}}_{i,t}$ = net income/total assets; ${\mathrm{TURN}}_{i,t}$ = sales/total asset; ${\mathrm{BETA}}_{i,t}$ = estimated value of beta, the number of months for five years before the relevant year as a variable corresponding to the systematic risk; ${\mathrm{DIV}}_{i,t}$ = cash dividends/net income; ${\mathrm{IND}}_i$ = industry dummy variables; and ${\mathrm{YR}}_t$ = year dummy variables.

In this study, the variable FOR is identified as a proportion, with its values spanning from 0 to 1. Addressing regression models where the dependent variable is a proportion presents several challenges, particularly when employing a standard linear regression methodology. Given that proportions inherently range between 0 and 1, linear regression can produce predictions that exceed these boundaries, resulting in implausible outcomes for proportion data. This problem is especially acute for predictions near the data’s limits, where the linear model does not accommodate the bounded nature of the data. Furthermore, linear regression presupposes a normal distribution of errors, yet the distribution of errors for proportions, especially near 0 or 1, may become skewed, contravening this assumption. Such skewness can undermine the reliability of hypothesis testing and confidence intervals generated from the model.

Considering these issues, alternative modeling techniques are generally more apt for handling proportion data. Consequently, this research employs Generalized Linear Models (GLMs) with a logit link as the analytical framework to test the hypothesis, providing a more suitable approach for the nature of the data in question. If beta1 in the research model shows a significant positive value, it can be interpreted as supporting the hypothesis that foreign investors tend to invest more in companies managed under the Target Management System compared to those that are not.

In order to examine Hypotheses 2a and 2b, this research incorporated interaction terms into the model. These terms were formulated by multiplying each investor sensitivity factor, namely information asymmetry and the company life cycle, with the variable representing companies managed under the Target Management System.

$$\begin{array}{l}FO{R}_{i,t}={\alpha }_0+{\beta }_{1}TM{S}_{i,t}+{\beta }_{2}I{A}_{i,t}+{\beta }_{3}TM{S}_{i,t}\times I{A}_{i,t}+{\beta }_{4}SIZ{E}_{i,t}+{\beta }_{5}OC{F}_{i,t}+{\beta }_{6}LE{V}_{i,t}+{\beta }_{7}MT{B}_{i,t}+{\beta }_{8}RO{A}_{i,t}\\ +{\beta }_{9}TUR{N}_{i,t}+{\beta }_{10}BET{A}_{i,t}+{\beta }_{11}DI{V}_{i,t}+IN{D}_i+Y{R}_t+{\epsilon }_t\end{array}$$

(2)

$$\begin{array}{l}FO{R}_{i,t}={\alpha }_0+{\beta }_{1}TM{S}_{i,t}+{\beta }_{2}L{C}_{i,t}+{\beta }_{3}TM{S}_{i,t}\times L{C}_{i,t}+{\beta }_{4}SIZ{E}_{i,t}+{\beta }_{5}OC{F}_{i,t}+{\beta }_{6}LE{V}_{i,t}+{\beta }_{7}MT{B}_{i,t}+{\beta }_{8}RO{A}_{i,t}\\ +{\beta }_{9}TUR{N}_{i,t}+{\beta }_{10}BET{A}_{i,t}+{\beta }_{11}DI{V}_{i,t}+IN{D}_i+Y{R}_t+{\epsilon }_t\end{array}$$

(3)

where ${\mathrm{IA}}_{i,t}$ = the standard deviation of weekly abnormal market returns throughout the year and ${\mathrm{LC}}_{i,t}$ = 1 when the gap between the R&D capitalization value and the amount of amortization is below the median, and zero in all other cases.

Similarly, if IA and LC are distinguished considerations for investments in a company under a Target Management System for foreign ownership, the coefficients in beta3 will show significant values. Furthermore, if one of the variables has a superior ability to increase foreign ownership, that coefficient will appear larger than that of the other variables.

In assessing the impact of information asymmetry, the volatility of stock returns is employed as a measure. This volatility is determined by the standard deviation of weekly abnormal market returns throughout the year, utilizing these returns to counteract the effects of nonsynchronous trading or bid-ask spread impacts observed in daily price movements. A firm is considered to have high information asymmetry when its stock return volatility is higher than the median, and conversely, low information asymmetry when it is below. For the analysis of company life cycles, this study adopts Oswald’s classification method. The stage of maturity for a company is identified based on the equilibrium of its R&D intensity. A company is categorized in the mature stage when its R&D capitalization is closely aligned with its amortization level. More specifically, this study assigns a code of one when the gap between the R&D capitalization value and the amount of amortization is below the median, and zero in all other cases.

The research model in this study includes appropriate control variables that can influence foreign ownership. There is firm size, operating cash flow, leverage, market-to-book ratio, return on assets (ROA), asset turnover, beta, and cash dividend.

In conducting all analyses for this study, the statistical package SAS 9.4 was utilized.

3.2. Sample Selection

Table 1. The Data Description.

Industry	Number of Firms	%
Farming/Forestry, Fishing, Mining	90	0.4
Food/Beverages, Tobacco	719	3.6
Textiles, Garment Manufacturing, Bags/Footwear	457	2.3
Wood, Pulp/Paper, Printing	366	1.8
Petroleum Refining, Chemicals, Rubber/Plastic, Recycled Raw Materials Processing	3235	16.3
Non-Metallic Minerals	359	1.8
Primary Metals, Metal Products	1290	6.5
Machinery/Equipment, Computers, Electrical Equipment, Electronic Components, Medical/Precision Instruments, Automobiles, Transport Equipment	6637	33.5
Furniture/Other Manufacturing	213	1.1
Electricity/Gas/Water Supply, Sewage/Wastewater, Waste Collection, Environmental Services	177	0.8
Construction	495	2.4
Wholesale and Retail Trade	1546	7.8
Service	4242	21.7
Total	19,826	100

outlines the methodology used for selecting the sample in this study. The sample comprises companies listed on the Korea Stock Exchange (KSE) and the Korea Securities Dealers Automated Quotation (KOSDAQ) as of 31 December 2022. These companies meet specific criteria: (1) non-financial institutions, (2) inclusion in the FnGuide database, and (3) absence of capital impairment. To address the potential impact of outliers, the extreme top and bottom 1% values, including control variables, are subject to winsorization. Table 1 also presents the industry-wise breakup of the companies analyzed in this research. Thus, the final data period selected for this study spans from 2010, when data collection began with the implementation of the Greenhouse Gas and Energy Target Management System (TMS), to the recent year of 2022, with a total of 19,826 firm-year samples ultimately being extracted.

4. Empirical Results

4.1. Descriptive Statistics

Table 2. Descriptive Statistics.

Variables	Mean	STD	Q1	Median	Q3
${TMS}_{i,t}$	0.503	0.327	0.000	1.000	1.000
${IA}_{i,t}$	0.501	0.500	0.000	1.000	1.000
${LC}_{i,t}$	0.483	0.499	0.000	0.000	1.000
${SIZE}_{i,t}$	25.939	1.357	25.011	25.695	26.612
${OCF}_{i,t}$	0.051	0.109	−0.004	0.052	0.108
${LEV}_{i,t}$	0.859	0.967	0.264	0.583	1.082
${MTB}_{i,t}$	1.862	1.880	0.751	1.248	2.196
${ROA}_{i,t}$	0.005	0.116	−0.013	0.024	0.061
${TURN}_{i,t}$	0.777	0.493	0.439	0.697	1.023
${BETA}_{i,t}$	0.866	0.396	0.588	0.873	1.144
${DIV}_{i,t}$	0.168	0.318	0.000	0.000	0.221

Notes: Variable definition: ${\mathrm{TMS}}_{i,t}$ = Target Management System management company; ${\mathrm{IA}}_{i,t}$ = (−1) × (the standard deviation of weekly abnormal market returns throughout the year); ${\mathrm{LC}}_{i,t}$ = 1 when the gap between the R&D capitalization value and the amount of amortization is below the median, and zero in all other cases; ${\mathrm{SIZE}}_{i,t}$ = Ln (total assets); ${\mathrm{OCF}}_{i,t}$ = operating cash flow/total asset; ${\mathrm{LEV}}_{i,t}$ = total debt/total asset; ${\mathrm{MTB}}_{i,t}$ = market value of equity/book value of equity; ${\mathrm{ROA}}_{i,t}$ = net income/total asset; ${\mathrm{TURN}}_{i,t}$ = sales/total asset; ${\mathrm{BETA}}_{i,t}$ = estimated value of beta, the number of months for five years before the relevant year as a variable corresponding to the systematic risk; ${\mathrm{DIV}}_{i,t}$ = cash dividends/net income.

presents the descriptive statistics for the main variables used in the regression model in the research. Except for the LC variable, most of the median values of the variables are larger compared to the mean values. Specifically, the average value of the TSM was 0.503 and the median value was 1.000. The mean (median) value for IA is 0.501 (1.000) and the mean (median) value of LC is 0.119 (0.125), which shows lower values compared to the other main variable.

Table 3. A Correlation Matrix.

	${TMS}_{i,t}$	${IA}_{i,t}$	${LC}_{i,t}$
${TMS}_{i,t}$	1.000	0.130	0.162
		(<0.0001)	(<0.0001)
${IA}_{i,t}$		1.000	−0.121
			(<0.0001)
${LC}_{i,t}$			1.000

(1) See Table 2 for definitions of the variables.

shows the correlations between the Target Management System, information asymmetry, and life cycle. While all correlations are statistically significant, they are relatively weak, with the TMS having a weak positive correlation with both IA and LC and a weak negative correlation existing between IA and LC.

4.2. Main Results and Discussion

Table 4. The relationship between Target Management System and foreign investors.

Variables	Coeff.	t-Stat.
${TMS}_{i,t}$	0.003	12.77 ***
${SIZE}_{i,t}$	0.030	58.63 ***
${OCF}_{i,t}$	0.087	13.60 ***
${LEV}_{i,t}$	−0.017	−22.65 ***
${MTB}_{i,t}$	0.009	25.17 ***
${ROA}_{i,t}$	0.026	3.81 ***
${TURN}_{i,t}$	0.008	5.77 ***
${BETA}_{i,t}$	−0.022	−13.12 ***
${DIV}_{i,t}$	0.007	3.81 ***
Industry Dummy	Included
Year Dummy	Included
$R^2$	0.46
F-stat.	30.47 ***
N	19,826

(1) *** indicates significance at the 1% level. (2) See Table 2 for definitions of variables.

presents a comprehensive analysis examining the influence of a company’s participation in the Target Management System (TMS) on the level of foreign investor ownership. The results are derived frosm a robust regression model that includes various control variables to capture the multifaceted nature of corporate financial characteristics and their impact on foreign investment.

The key variable of interest, the TMS, shows a positive coefficient (0.003) with a t-statistic of 12.77, signifying a statistically significant positive relationship between a company’s engagement in the TMS and the extent of foreign investor ownership. This finding provides empirical support for the hypothesis that foreign investors favor companies involved in the TMS.

Additionally, control variables such as company size (SIZE), operating cash flow to total assets ratio (OCF), leverage ratio (LEV), market-to-book value ratio (MTB), return on assets (ROA), asset turnover (TURN), systematic risk beta (BETA), and dividend payout ratio (DIV) are incorporated into the model. All these variables demonstrate significant relationships with foreign investor ownership at the 1% significance level. This indicates that factors like company size, financial performance, and risk profile are critical determinants of foreign investor engagement.

The inclusion of industry and year dummies ensures that the model accounts for potential variations across different sectors and temporal changes, thereby enhancing the robustness and generalizability of the findings. The high F-statistic value of 530.47, significant at the 1% level, confirms the overall statistical significance of the model, further validating the reliability of the results.

With a substantial sample size of 19,826 observations, this study offers a comprehensive and reliable analysis of the factors influencing foreign investor ownership in companies. The significance levels, indicated by asterisks, provide a clear understanding of the robustness of each variable’s impact within the model.

In conclusion, the analysis in Table 3 decisively suggests that foreign investors display a preference for companies managed under the TMS, with other financial and operational characteristics also playing significant roles in determining the level of foreign investment.

Table 5. Investor Sensitivity to Implementation of the System.

Panel A. Information Asymmetry
	Coeff.	t-Stat.
${TMS}_{i,t}$	0.002	5.98 ***
${IA}_{i,t}$	0.003	2.06 **
${TMS}_{i,t}$ × ${IA}_{i,t}$	0.001	2.65 ***
${SIZE}_{i,t}$	0.030	58.06 ***
${OCF}_{i,t}$	0.087	12.58 ***
${LEV}_{i,t}$	−0.017	−22.37 ***
${MTB}_{i,t}$	0.009	25.27 ***
${ROA}_{i,t}$	0.026	3.80 ***
${TURN}_{i,t}$	0.008	5.70 ***
${BETA}_{i,t}$	−0.021	−12.19 ***
${DIV}_{i,t}$	0.007	3.71 ***
Industry Dummy	Included
Year Dummy	Included
F-value	500.97 ***
Adj. R2	0.46
N	19,826
Panel B. Life Cycle
	Coeff.	t-Stat.
${TMS}_{i,t}$	0.004	13.02 ***
${LC}_{i,t}$	0.000	0.26
${TMS}_{i,t}$ × ${LC}_{i,t}$	0.002	4.28 ***
${SIZE}_{i,t}$	0.030	58.01 ***
${OCF}_{i,t}$	0.088	12.65 ***
${LEV}_{i,t}$	−0.017	−22.53 ***
${MTB}_{i,t}$	0.009	25.08 ***
${ROA}_{i,t}$	0.027	3.88 ***
${TURN}_{i,t}$	0.008	5.84 ***
${BETA}_{i,t}$	−0.022	−13.11 ***
${DIV}_{i,t}$	0.007	3.77 ***
Industry Dummy	Included
Year Dummy	Included
F-value	501.26 ***
Adj. R2	0.46
N	19,826

(1) *** and ** indicate significance at the 1% and 5% level, respectively. (2) See Table 2 for definitions of variables.

presents the empirical findings from the examination of the second set of hypotheses. Hypothesis 2a posits a stronger association between companies operating under the Target Management System (TMS) and the level of foreign investment, particularly in firms with lower levels of information asymmetry. This hypothesis is rooted in the notion that the complexity of the TMS process and the execution of its objectives may result in varying degrees of investor sensitivity to its implementation. Typically, domestic investors possess more nuanced information about the TMS and the domestic companies’ capabilities and know-how in managing greenhouse gas emissions compared to foreign shareholders. In cases where significant information asymmetry exists between domestic and foreign investors, especially institutional ones, those with insider knowledge may exploit this advantage for personal gains.

In this study, stock return volatility, calculated as the standard deviation of weekly market excess returns, serves as a proxy for the information asymmetry between internal and external investors. High stock return volatility, indicating firms with volatility above the median in year t, is used to measure this asymmetry. For analytical ease, this study inverts this measure by multiplying it by (−1), thus examining whether lower information asymmetry correlates with an increase in foreign investor ownership.

The results from Panel A of Table 4 reveal that the interaction term of the TMS with low information asymmetry, TMS X IA, has a positive and significant effect on foreign ownership. These findings suggest that in environments with lower information asymmetry, TMS-managed companies are more likely to effectively signal their potential for target achievement to foreign investors, who, in turn, appear to favor such an information environment.

Secondly, Hypothesis 2b explores the variability in the relationship between TMS-managed companies and foreign investors across different corporate life cycles. Prior to empirical testing, it is uncertain whether firms in their maturity stage engage more efficiently in the implementation of the Target Management System objectives compared to those in other stages of their life cycle. Mature companies, with their substantial internal capital and resources, are well-positioned to achieve carbon reduction or mitigation targets. Given their accumulated efficiency and resources over time, it can be hypothesized that foreign investors might prefer investments in mature-stage companies. Conversely, there exists a possibility that mature firms might be less inclined to enhance investments or diligently pursue target fulfillment. This could be attributed to their already-established reputation capital and the relatively minor repercussions of non-compliance with targets.

Despite these factors, for mature companies, accruing additional ethical reputation remains crucial for their sustained survival and growth. As such, this study refrains from making any predetermined assumptions about the commitment of mature-stage firms to Target Management System activities.

The findings, as presented in Panel B of Table 5, reveal that the interaction term (TMS X LC) demonstrates a statistically significant positive value, at least at the 1% significance level. This supports Hypothesis 2b, suggesting that mature-stage firms are likely to have a more substantial influence on the relationship between TMS-managed companies and foreign investors. These empirical results carry significant implications for both internal and external investors, highlighting the varying impact of a company’s life cycle stage on the dynamics between TMS-managed companies and foreign investor engagement.

4.3. Foreign Investors’ Investment Periods

In this segment of the research, this study delved into the investment horizons that foreign investors consider when allocating capital to companies within the Target Management System (TMS). The core objective was to discern whether these investments are driven by short-term factors, including immediate environmental concerns, or if they reflect a long-term strategic perspective, recognizing the sustainable value of these companies.

This study focused on the regression coefficients of the TMS as the primary independent variable, examining their significance over various investment periods. Remarkably, the results in

Table 6. Investment Periods.

Variable	For t + 1		For t + 2		For t + 3
	Coeff.	t-Stat.	Coeff.	t-Stat.	Coeff.	t-Stat.
Intercept	−0.980	−18.01 ***	−1.047	−11.42 ***	−0.934	−47.94 ***
${\mathrm{TMS}}_{i,t}$	0.001	4.18 ***	0.001	4.44 ***	0.001	5.01 ***
Controls	Included		Included		Included
IND Dummy	Included		Included		Included
YEAR Dummy	Included		Included		Included
$R^2$	0.30		0.29		0.29
F-stat.	240.65 ***		216.50 ***		196.89 ***
N	17,663		15,629		13,686

(1) *** indicates significance at the 1% level. (2) See Table 2 for definitions of variables.

indicated that the influence of the TMS remains statistically significant at the 1% level, not just in the short term but extending up to a maximum of three years. This consistency in the data suggests a profound insight: foreign investors do not view TMS-managed companies merely as vehicles for short-term environmental impact investments. Instead, these results imply a deeper investment rationale, where foreign investors perceive TMS-managed companies as viable, long-term partners in sustainability.

Such findings challenge the conventional view of foreign investment in environmentally focused companies as opportunistic or short-lived. They underscore a strategic shift among foreign investors towards valuing long-term sustainability and environmental stewardship. This is indicative of a broader trend in the investment community, where environmental and sustainability factors are increasingly integrated into the core investment strategy, reflecting a commitment to responsible and sustainable growth.

4.4. Additional Consideration for the Earnings Quality

In her 2003 study, Jeon Young-soon posited that foreign and domestic institutional investors, if they engage in qualitative analysis of accounting earnings in their investment decision-making, might discern systematic differences in the quality of accounting earnings between firms they invest in and those they do not. Empirically, it was found that foreign investors indeed conduct qualitative analyses of accounting earnings and preferentially select firms with higher quality earnings [14]. This logic raises the question: Would foreign investors also favor TMS-managed companies with superior accounting earnings quality? To address this, the following analysis was conducted.

Consistent with previous studies on earnings quality, this study employs modified discretionary accruals as a proxy [32]. Discretionary accruals are derived as residuals from the modified Jones model, adapted for cross-sectional analysis. In the model, ‘i’ denotes the firm, and ‘t’ is the fiscal year. Total accruals (TA) are calculated by the difference between operational cash flow and net income, with each variable adjusted by lagged total assets. Changes in sales (ΔS) and accounts receivables (ΔAR) are considered, along with property, plant, and equipment (PPE). Return on assets (ROA) is included due to its influence on discretionary accruals [33]. This model is applied industry-year-wise, and the absolute value of residuals is taken as the measure of discretionary accruals (DA), representing accrual management affecting income positively and negatively.

$$\frac{T{A}_t}{A_{tㅡ1}}={\alpha }_0+{\beta }_1\frac{1}{A_{tㅡ1}}+{\beta }_2\frac{\Delta S_t\hspace{1em}\Delta A{R}_t}{A_{tㅡ1}}+{\beta }_3\frac{PP{E}_t}{A_{tㅡ1}}+{\beta }_{3}RO{A}_t+{\epsilon }_t$$

(4)

where TA = Net income cash flow from operations; S = Sales revenue; AR = Accounts receivables; PPE = Plant, property, and equipment; ROA = Net income/total assets; A = Total assets.

Table 7. Earnings Quality.

Variables	High Earnings Quality		Low Earnings Quality
	Coeff.	t-Stat.	Coeff.	t-Stat.
Intercept	−1.031	−42.76 ***	−0.960	−42.07 ***
${\mathrm{TMS}}_{i,t}$	0.001	4.33 ***	0.006	1.17
Controls	Included		Included
IND Dummy	Included		Included
YEAR Dummy	Included		Included
$R^2$	0.33		0.27
F-stat.	156.38 ***		121.89 ***
N	9383		9387

(1) *** indicates significance at the 1% level. (2) See Table 2 for definitions of variables.

displays additional regression results examining the relationship between TMS-managed companies and foreign investors, specifically considering earnings quality as indicated by discretionary accruals (DA). As evident in the first column, the TMS coefficient is significantly positive in the sample with high earnings quality, suggesting that the quality of earnings influences foreign investors’ preferences.

5. Conclusions

5.1. Summary

In the context of the ongoing global discourse on climate change, which is not merely a transient phenomenon but a strategic shift towards the sustainable development of the world economy, nations are increasingly recognizing climate change not only as an environmental issue but also as a pivotal economic one. Countries, especially developed ones, are significantly increasing their investments in low-carbon energy technologies. Given the proactive stance of the new U.S. administration on environmental protection, the pace of international discussions on climate change response is likely to accelerate, potentially intensifying the pressure on developing countries to reduce greenhouse gas emissions.

Considering this global trend, South Korea is expected to act on greenhouse gas reduction obligations in the post-Kyoto framework. Given the relatively underprepared state for greenhouse gas reduction compared to developed countries, there is an urgent need for establishing a statistical foundation for accurate and reliable greenhouse gas emissions calculation. Such a foundation is crucial for enhancing the accuracy of current assessments and projections, enabling the setting of feasible greenhouse gas reduction targets tailored to the economy. While setting and gradually implementing achievable reduction targets may induce short-term shocks to the energy-intensive industrial structure, it could eventually transition the economy towards a more advanced industrial framework akin to developed countries.

Moreover, as the response to climate change (initially an environmental issue) expands into an economic challenge, countries worldwide are competing to seize opportunities in this new market. Echoing the 18th-century Industrial Revolution sparked by the transition from wood to coal, the 21st century is poised for a low-carbon Industrial Revolution. Although responding to climate change through greenhouse gas reduction might temporarily impact the economy, voluntary and efficient strategies could elevate South Korea’s economic standing, providing opportunities for growth and advancement.

In this vein, the interest of foreign investors in systems like the Target Management System (TMS), which is aimed at reducing greenhouse gas emissions, becomes crucial. Their investments serve as a potent incentive for companies, aligning corporate strategies with environmental goals. This trend, a focal point of this study, underscores the importance of foreign investment in reinforcing corporate commitments to sustainable practices. The government, in turn, should implement viable reduction policies, effectively reducing uncertainties and fostering a conducive environment for sustainable economic growth. Such a balanced approach, combining investor incentives and governmental action, not only aligns with academic discourse but also paves the way for practical, impactful strategies in addressing global climate challenges.

5.2. Discussion

This study highlights the role of foreign investment in promoting corporate transparency and environmental policies, emphasizing how such investments drive firms toward sustainability. Our research so far has focused on the Target Management System (TMS) as a regulatory framework in South Korea. For future research, it would be intriguing to investigate whether foreign investors show a preference for companies that voluntarily commit to environmental issues, extending the discussion on the dynamic interplay between foreign investment and corporate environmental responsibility. This could further our understanding of how investment practices can foster positive environmental changes and encourage sustainable practices in emerging markets.

Like many empirical studies, this research faces endogeneity issues, notably without controlling for a firm’s inclination to participate in the TMS program. While acknowledging this limitation, this study employs Generalized Linear Models (GLMs) instead of standard regression models, aiming to mitigate endogeneity concerns. Despite these efforts, endogeneity remains a significant challenge that necessitates caution in interpretation, marking a critical limitation of this research. This complexity arises from potential reciprocal influences between foreign investors and TMS companies, alongside the possibility of latent or omitted variables affecting the analysis, leading to biased estimations.