Does Foreign Institutional Equity Participation Instigate Sustainable Corporate Investment Efficiency? Evidence from Emerging Economies

Abstract

This study examines the impact of overall foreign institutional equity participation and its two types—foreign institutional pressure-resistant and pressure-sensitive—on firm sustainable investment efficiency for non-financial listed domestic firms of three emerging economies over the period of 2009–2018, using an unbalanced panel of 733 firms with 4468 firm-year observations. It also investigates the impact of varying levels of foreign equity participation on investment efficiency. We used the regression estimation technique with robust standard errors clustered at the firm level. We also used the second-stage instrumental variable (IV) method to control potential endogeneity. Empirical findings reveal that overall foreign institutional equity participation and foreign institutional pressure-resistant ownership have a positive and significant impact on corporate investment efficiency, whereas foreign institutional pressure-sensitive ownership has a positive but insignificant impact. When we divided the overall institutional foreign equity ownership and its two types into five levels, we found a positive and significant impact of overall foreign institutional ownership at all levels. The foreign institutional pressure-resistant ownership has a positive and significant impact on investment efficiency when it is greater than 10%. However, we found a weak relationship of foreign institutional pressure-sensitive equity ownership with investment efficiency at all varying levels of investments. These results are robust when we controlled for endogeneity. Our results have implications for policymakers, regulators, academicians, and potential foreign equity participants. These results can be generalized to those emerging economies that have the potentials for attracting foreign equity inflows.