A Comparison of the Return Forecasting Power of Domestic and International Equity Investors: Evidence from India

Abstract

Emerging markets have benefited from positive cross-border flows primarily due to a favourable growth differential relative to similar markets. However, the benefits from international flows have been sub-optimal due to the relatively weak information environment. In this paper, we compare the return forecasting power of international and domestic institutional investors using a comprehensive equity holdings dataset of Indian firms for the period 2001-2017. Each year-quarter, we run separate cross-sectional regressions of one-quarter ahead stock returns on the level holdings of domestic and foreign investors and several control variables. The results show that international institutional investors are at a disadvantage relative to domestic institutions in predicting future returns. Further, the predictive power of domestic institutional investor demand is superior for firms in the smallest size quartile relative to the largest size quartile.