Building on prior study that documents the positive relationship between firm-specific investor sentiment and future stock price crashes, this study further investigates the role of foreign investors as sophisticated participants in Korea stock market. Using KSE-listed firms for the period of 2011-2019, the moderate effect of foreign investors on the positive relationship between the sentiment and the stock crash risk is estimated. The findings show that the increased future stock price crash risk which is attributable to high investor sentiment is mitigated for firms with the high foreign ownership. However, such moderate effect disappears in the estimation which takes foreign investment horizon into consideration. This implies that the role of foreign investors in reducing future stock price crashes due to the investor sentiment lies in foreign investors dedicated to a corporate monitor with long-term investment horizon. This study adds to the literature on the role of foreign investors by suggesting that foreign investors play as a rigorous monitor rather than a price maker who is rational under sentiment state, which enhance market’s efficiency in the Korean stock market.​

Keywords: Firm-specific invest sentiment, stock price crash, foreign investors, sophisticated investors, monitoring role.