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Article
Publication date: 29 November 2021

Hardik Marfatia

There is no research on understanding the difference in the nature of volatility and what it entails for the underlying relationship between foreign institutional investors

Abstract

Purpose

There is no research on understanding the difference in the nature of volatility and what it entails for the underlying relationship between foreign institutional investors (FII) flows and stock market movements. The purpose of this paper is to explore how permanent and transitory shocks dominate the common movement between FII flows and the stock market returns. As emerging markets are a major destination of international portfolio investments, the author uses India as a perfect case study to this end.

Design/methodology/approach

The paper uses the permanent-transitory as well as a trend-cycle decomposition approach to gain further insights into the common movement between foreign institutional investors (FII) flows and the stock market.

Findings

When the author identifies innovations based on their degree of persistence, transitory shocks dominate stock returns, whereas permanent shocks explain movements in foreign institutional investors (FII) flows. Also, stock returns have a larger cyclical component compared to cycles in foreign flows. The authors find the sharp downward (upward) movement in the stock market (FII flows) cycle in the initial period of the COIVD-19 pandemic was quickly reversed and currently, the stock market (FII flows) is historically above (below) the long-term trend, hinting at a correction in months ahead. The authors find strikingly similar stock market cycles during the global financial crisis and COVID-19 period.

Research limitations/implications

Evidence suggests the presence of long stock market cycles – substantial and persistent deviations of actual price from its fundamental (trend) value determined by the shared relationship with foreign flows. This refutes the efficient market hypothesis and makes a case favoring diversification gains from investing in India. Further, transitory shocks dominate the forecast error of stock market movements. Thus, the Indian market provides profit opportunities to foreign investors who use a momentum-based strategy. The author also finds support for the positive feedback trading strategy used by foreign investors.

Practical implications

There is a need for policymakers to account for the foreign undercurrents while formulating economic policies, given the findings that it is the permanent shocks that mostly explain movements in foreign institutional flows. Further, the author finds only stock markets error-correct in response to any short-term shocks to the shared long-term relationship, highlighting the disruptive (though transitory) role of FII flows.

Originality/value

Unlike existing studies, the author models the relationship between stock market returns and foreign institutional investors (FII) flows by distinguishing between the permanent and transitory movements in these two variables. Ignoring this distinction, as done in existing literature, can affect the soundness of the estimated parameter that captures the nexus between these two variables. In addition, while it may be common to find that stock market returns and FII flows move together, the paper further contributes by decomposing each variable into a trend and a cycle using this shared relationship. The paper also contributes to understanding the impact of COVID-19 on this relationship.

Book part
Publication date: 27 September 2011

Mangesh Tayde and S.V.D. Nageswara Rao

Purpose – The aggregate investment by foreign institutional investors (FIIs) in the Indian stock market is significant compared to that by domestic institutions and…

Abstract

Purpose – The aggregate investment by foreign institutional investors (FIIs) in the Indian stock market is significant compared to that by domestic institutions and individual (retail) investors. The question of whether FIIs exhibit herding and positive feedback trading while investing in the Indian stock markets has not been examined so far. This study is an attempt to fill the gap and contribute to the existing evidence on foreign portfolio investment in India.

Methodology/approach – We have analyzed the daily data on purchases and sales of securities by FIIs sourced from the Securities and Exchange Board of India (SEBI), and the Bombay Stock Exchange (BSE). We have adopted the approach of Lakonishok et al. (1992), and Wermers (1999) to examine herding and positive feedback trading by foreign investors.

Findings – Our results suggest that FIIs exhibit herding and positive feedback trading during different phases of the stock market. This observed behavior is prominent in but not restricted to large cap stocks as they enjoy better liquidity.

Social implication – The herding and positive feedback trading by FIIs is a cause for concern for government of India, capital market regulator (SEBI), and the country's central bank (RBI) as it adversely affects stock prices and volatility. They are required to formulate and implement a suitable policy response given their objective of protecting the interests of small investors in the market. They may also have to monitor the purchases and sales of equities by FIIs in general and of better performing large cap stocks in particular.

Article
Publication date: 18 September 2020

Saima Karim and Muhammad Ilyas

The aim of this study is to investigate the effect of foreign institutional investors (FII) on the contribution of cash and dividend to firm's value in the context of Japan.

Abstract

Purpose

The aim of this study is to investigate the effect of foreign institutional investors (FII) on the contribution of cash and dividend to firm's value in the context of Japan.

Design/methodology/approach

This study used a sample of 1,929 nonfinancial firms listed in Tokyo Stock Exchange in the period from 2002 to 2016. For data analysis, pooled OLS regression with firm and year fixed effect is applied. Further, the p-value of difference is used to test the null hypothesis of equal coefficients.

Findings

The findings depict that cash holdings contribute more to firm's value when ownership by FII is high. Contrarily, dividends contribute more to firm's value when ownership by FII is low. The results remain consistent after using excess cash holdings instead of cash holdings and after re-estimating the main regression model in the presence of top 30% and bottom 30% ownership level.

Research limitations/implications

This study is limited to Japanese nonfinancial sector. The results implied that firms where the probability of managerial agency cost and expropriation of cash is high, the presence of FII mitigates the agency cost and positively influences the contribution of cash to firm's value. Overall, this research highlighted the disciplinary and monitoring role of FII in Japan.

Originality/value

This study provides new insights on the monitoring and governance role of foreign institutions, showing that FII promote better cash management and utilization, which significantly affects the contribution of cash holdings to firm's value.

Details

Managerial Finance, vol. 47 no. 3
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 5 September 2020

Manogna R L, Aswini Kumar Mishra and Abhishek Kumar Sinha

The preference of firm internationalization is shaped by different groups of owners and the institutional environment in which the firm operates. Past studies have largely…

Abstract

Purpose

The preference of firm internationalization is shaped by different groups of owners and the institutional environment in which the firm operates. Past studies have largely ignored the heterogeneity among the controlling groups in influencing the internationalization decision in emerging economy firms.

Design/methodology/approach

In this study, the authors draw understanding from behavioral risk perspective and institutional theory to inspect the risk perceptions and propensities of various ownership groups such as lending institutions, domestic mutual funds and foreign institutional investors (FIIs). Empirical analysis was conducted from a sample of 2695 unique BSE-listed nonfinancial Indian firms during 2005−2019 period using Tobit panel regression analysis.

Findings

The findings reveal that firms' international investments are impacted differently by ownership share of different types of institutional investors after controlling for firm-level resources and capabilities. While lending institutions and FIIs are supportive of foreign investments by firms, domestic mutual funds are not supportive of this strategic decision on foreign investment.

Research limitations/implications

Further, our results show that family ownership, measured in terms of family shareholding, negatively moderates the lending institutions toward internationalization and does not impact the FIIs and mutual fund investor's decision regarding the foreign investments.

Originality/value

To the best of the author's knowledge, the current paper is the first to address the risk perceptions of various ownership groups on firm's international outlook in an emerging economy context with the latest data. This practical perspective helps the organizations in managing the ownership holdings.

Details

Journal of Strategy and Management, vol. 14 no. 1
Type: Research Article
ISSN: 1755-425X

Keywords

Article
Publication date: 25 December 2020

Veena Madaan and Monica Shrivastava

This paper investigates herding behavior and its persistence among foreign institutional investors (FIIs) in the individual stocks of the energy sector of Indian stock…

Abstract

Purpose

This paper investigates herding behavior and its persistence among foreign institutional investors (FIIs) in the individual stocks of the energy sector of Indian stock exchange by focusing on post turmoil period. The study also examines the relation of herding with the individual return, market return, trading volume and conditional volatility of individual and market return.

Design/methodology/approach

The presence of herding is investigated by Lakonishok et al. (1992) model, value-based and count-based herd ratio measure among FIIs in individual stock of energy sector post turmoil period. Further, run test was employed to check the persistency in herding and multivariate distributed lag to investigate the relationship with the market determinant.

Findings

The result indicates the existence of herding in most of the companies and strong persistence in all the companies. The intensity of buy side herding is higher than sell side. Herding and individual return both are significant driving forces of FIIs herding, while trading volume and market volatility in few companies exhibit inverse relationship.

Research limitations/implications

This study is limited to investigation of energy sector stock.

Social implications

Stock market is significantly influenced by FIIs and their propensity to herd may generate instability in the stock market. Therefore, regulatory authority should continuously monitor the flow of fund by FIIs.

Originality/value

Herding in the individual stock of the energy sector was not previously performed.

Details

South Asian Journal of Business Studies, vol. 11 no. 2
Type: Research Article
ISSN: 2398-628X

Keywords

Article
Publication date: 4 April 2019

Brahmadev Panda and N.M. Leepsa

Previous empirical evidence scrutinizing the impact of the institutional ownership on the firm performance has produced inconclusive results and mostly concentrated in the…

Abstract

Purpose

Previous empirical evidence scrutinizing the impact of the institutional ownership on the firm performance has produced inconclusive results and mostly concentrated in the developed market. Hence, the purpose of this paper is to assess the impact of the ownership engagement by pressure-resistant, pressure-sensitive and foreign institutions on the corporate financial performance in a developing market like India post US financial crisis.

Design/methodology/approach

This study considers a panel data set of 361 Indian listed firms from National Stock Exchange (NSE) 500 index for a period of eight years from financial year (FY) 2008-2009 to FY 2015-2016. The panel data regression (pooled ordinary least square [OLS], fixed-effect [FE] and random-effect [RE]) and simultaneous equation modeling are used by considering the institutional ownership engagement as both exogenous and endogenous variable.

Findings

The test results show that institutional ownership engagement by the pressure-resistant and foreign institution have a robust and positive effect, while ownership engagement by the pressure sensitive institution has an adverse impact on the financial performance of the Indian listed firms.

Research limitations/implications

The findings will boost the monitoring activities of the institutional owners in the developing markets. The investment from pressure-resistant and foreign institutions needs to be augmented in Indian firms to improvise their governance functions and performance.

Originality/value

This research will enrich the governance literature of the developing economies as the studies on institutional ownership engagement are limited in the developing world. Further, this study adds value by capturing two emerging institutional ownership category such as the pressure-resistant and pressure-sensitive, which are still untouched in the Indian context. Next, the consideration of the institutional ownership as both exogenous and endogenous is also novel to the Indian literature.

Details

International Journal of Law and Management, vol. 61 no. 2
Type: Research Article
ISSN: 1754-243X

Keywords

Article
Publication date: 1 December 2020

Manogna R.L. and Aswini Kumar Mishra

The preference of firm corporate social responsibility (CSR) spending is shaped by different groups of owners and the institutional environment in which the firm operates…

Abstract

Purpose

The preference of firm corporate social responsibility (CSR) spending is shaped by different groups of owners and the institutional environment in which the firm operates. This paper aims to study the heterogeneity among the controlling groups and firms’ internationalization in influencing the CSR decision in emerging economy firms.

Design Methodology Approach

This paper draws understanding from institutional theory to inspect the propensities of various ownership groups such as lending institutions (LI), domestic mutual funds (MF) and foreign institutional investors (FIIs). The empirical analysis was conducted from a sample of 1,594 unique Bombay stock exchange (BSE)-listed non-financial Indian firms during the 2014–2019 period using Tobit panel regression analysis.

Findings

The findings reveal that firms’ CSR activities are impacted differently by ownership share of different types of institutional investors after controlling for firm-level resources and capabilities. Lending institutions, FIIs and MF are supportive of CSR investments by firms along with international investments by the firm. Further, the results show that the CSR spend is positively influenced by the business group affiliation of the firm compared to the unaffiliated group of firms.

Practical Implications

The analysis has implications for both institutional investors and multinational firms. In the merging market context, managers and owners who target long term strategies such as CSR will benefit from increasing shareholdings of creditors (lending institutions). They can also take steps to improve their transparency and corporate governance structure so as to attract foreign institutional investments, thus, in turn, helping the internationalization process of the firm.

Originality Value

This paper considers the role of the diverseness of the ownership institutional investors along with the moderating effect of business group affiliation of the firm and international investments in impacting the CSR spend. This disparity has not been previously studied with the latest data in an emerging economy context.

Details

Journal of Asia Business Studies, vol. 15 no. 2
Type: Research Article
ISSN: 1558-7894

Keywords

Article
Publication date: 25 July 2019

Chwee Ming Tee

The purpose of this paper is to examine the investment preference of various types of institutional investors in Malaysia, and its influence on firm valuation, operating…

Abstract

Purpose

The purpose of this paper is to examine the investment preference of various types of institutional investors in Malaysia, and its influence on firm valuation, operating performance and capital expenditure.

Design/methodology/approach

This study employs ordinary least squares model to examine: investment preference according to different types of institutional investors; the association between various types of institutional investors and firm valuation; the association between various types of institutional investors and firm performance; and the association between various types of institutional investors and capital expenditure.

Findings

The result shows that different types of institutional investors exhibit different investment preference. From the domiciles perspective, local institutional investors (LII) are found to be associated with higher Tobin’s Q, ROA and net profit margin. When viewed from business relationship perspective, “pressure-resistant” institutional investors (PRII) are positively associated with Tobin’s Q, ROA and net profit margin. Both LII and PRII are also associated with higher capital expenditure.

Originality/value

This study reveals the investment preferences of various types of institutional investors in an emerging market economy. The results show that institutional monitoring is associated with higher firm valuation, higher firm performance and higher capital expenditure. However, the effect is largely driven by local and PRII, particularly government-controlled institutional funds. These evidence suggest that different firm outcomes between emerging and advanced economy can be explained by variation in institutional setting.

Article
Publication date: 11 January 2021

Manogna R.L.

Previous studies have examined the relationship between institutional investors and corporate social responsibility (CSR) engagement primarily for the case of developed…

Abstract

Purpose

Previous studies have examined the relationship between institutional investors and corporate social responsibility (CSR) engagement primarily for the case of developed nations. The purpose of this paper is to look at the association between different ownership categories and CSR spending of selected Indian firms within an emerging market context.

Design/methodology/approach

This study examines the motivations that guide the CSR strategies of different ownership groups. Random-effects Tobit panel regression is performed on a panel of BSE-listed non-financial Indian firms panel comprising of 5,313 firm year observations over a six-year period (2014-2019).

Findings

Heterogeneous behavior of institutional investors is revealed through the study. Different categories of institutional investors have different preferences for CSR spending of a firm. Lending institutes and foreign institutional investors (FIIs) are seen to support the CSR investments. However, mutual fund investors are seen to not influence the CSR spend by the firms. Further, the results show that family ownership, measured in terms of family shareholding, positively moderates the lending institutions and mutual funds toward CSR and does not impact the FIIs decision regarding the CSR investments.

Practical implications

The analysis has implications for both institutional investors and multinational firms. In the emerging market context, managers and owners who target long term strategies such as CSR, will benefit from increasing shareholdings of creditors (lending institutions). They can also take steps to improve their transparency and corporate governance structure so as to attract the foreign institutional investments.

Originality/value

Managers cannot ignore the heterogeneities of institutional investors in their investment decisions and hence CSR decisions need to align with those of different types of investors. This study adds to the existing literature by offering new empirical insights from the perspective of an emerging market, India.

Details

Review of International Business and Strategy, vol. 31 no. 4
Type: Research Article
ISSN: 2059-6014

Keywords

Article
Publication date: 20 October 2020

Manogna R.L. and Aswini Kumar Mishra

Internationalization is an important strategy for the long-term survivability of the firms and is often influenced by the ownership groups along with the family…

Abstract

Purpose

Internationalization is an important strategy for the long-term survivability of the firms and is often influenced by the ownership groups along with the family involvement in the management decisions. The purpose of this study is to investigate empirically the outward propensities of various ownership groups such as foreign institutional investors, domestic mutual funds and lending institutions.

Design/methodology/approach

This paper analyzes the moderating effects of the family’s influence on the relationship between various ownership categories and internationalization, which is measured in terms of foreign investments and export intensity. An analysis of listed non-financial Indian firms recorded during the years 2005–2019, constituting a panel of 43,928 firm-year observations was conducted by using the tobit and probit panel regression models.

Findings

The results demonstrate that internationalization of the firm is positively impacted by the foreign institutional investors and lending institutions. However, when the family ownership is moderated across the ownership categories, it can be seen that it negatively impacts the lending institutions and positively impacts the foreign institutional investors. In the case of mutual funds, no impact of family ownership in the firm’s foreign investment decisions can be seen.

Originality/value

As there are limited studies about family ownership influence on the firm’s internationalization decision in the context of India, this paper takes an inclusive approach to the changing nature of the influence of ownership on the international expansion process.

Details

Review of International Business and Strategy, vol. 31 no. 1
Type: Research Article
ISSN: 2059-6014

Keywords

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