Foreign Institutional Investors Research Articles

Foreign institutional ownership and corporate labor investment

AbstractWe examine the impact of foreign institutional ownership on firms' labor investment efficiency. Using a comprehensive global sample of firms across 37 non‐U.S. countries, we find that greater ownership by foreign institutional investors is significantly associated with lower deviations of labor investment from the level justified by economic fundamentals, that is, higher labor investment efficiency. Independent, U.S.‐based and common‐law foreign institutional investors increase labor investment efficiency to a greater extent than their gray, non‐U.S.‐based and civil‐law peers. We further find evidence supporting the value creation of foreign institutions through the improvement in labor investment efficiency. Overall, our results suggest that foreign institutional investors promote good corporate governance practices around the world.

Heterogeneity of foreign investors and Knightian uncertainty: Evidence from the Chinese capital market

Foreign investors are playing an increasingly important role in China's capital market, and the impact of northbound funds on Knightian uncertainty has attracted much academic attention. Based on the characteristics of northbound funds' trading behavior and investors' shareholding stability, this study divides them into long-term investors and short-term opportunists. It also examines the effect of long- and short-term foreign investors on individual stock Knightian uncertainty. The study finds that higher stability of northbound fund shareholding lowers the Knightian uncertainty of individual stocks, and long-term foreign institutional investors contribute to market stability. Furthermore, long-term investments in northbound funds can reduce Knightian uncertainty by improving the information environment, influencing the trading behavior of institutional investors, boosting investor confidence, and helping investors form consistent expectations. In conclusion, short-term foreign investors aggravate market volatility, whereas long-term foreign institutional investors help stabilize the market.

Institutional investor stewardship and material sustainability information: Evidence from Taiwan

Institutional investors generally promote better sustainability disclosure and performance quality, which emphasize environment, social, and governance (ESG) development. Utilizing the SASB standards that improve the financial materiality of sustainability information, we find that institutional investors in Taiwan foster both material and immaterial ESG disclosure and performance. Thus, institutional investors seem to target the common good and follow the stewardship code instead of focusing only on ESG performance that closely relates to firm value. Our findings are driven by domestic rather than foreign institutional investors, suggesting that domestic institutions enjoy some information advantage and therefore drive ESG improvements more efficiently.

MSCI index inclusion and price efficiency evidence from China

In the recent years, foreign institutional investors have significant impact on Chinese market. We adopt 2017 MSCI index inclusion in the Chinese market to test the exogenous shock of foreign institutional investors on the efficiency of stock price. The results show that the foreign institutional investors increase the price efficiency. The effect is more significant in state-owned enterprises, the enterprises with higher degree of judicial civilization and analyst attention. The results remain robust after multiple MSCI sequent expansions. Foreign institutional investors are the main drive for firm-specific price efficiency. Our paper provides evidence for the positive role of foreign institutional investor in Chinese market.

A Study on Impact of Foreign Institutional Investors on Indian Capital Market Volatility

A Study on Impact of Foreign Institutional Investors on Indian Capital Market Volatility

Foreign institutional investors’ certification and domestic minority shareholders’ mistrust

AbstractUsing hand‐collected data from China's split share structure reform (SSSR) program, we show that foreign institutional investors’ certification mitigates domestic minority shareholders’ mistrust of controlling shareholders’ reform plans and facilitates the implementation of the SSSR. Domestic minority shareholders cast fewer dissenting votes, complete the SSSR more quickly but with lower compensation, and achieve higher stock return reactions in reforming firms with higher foreign institutional ownership. Foreign institutional investors’ prestige is a key factor in aligning domestic minority shareholders toward seeking long‐term payoffs. Our work reveals the positive role of foreign institutional investors’ certification in a salient reform of corporate governance.

Green-selecting: Foreign institutional ownership and corporate green practices

To address the widespread skepticism of firms’ environmental commitments, we show that foreign institutional ownership can positively predict the holding firm's real green practices. Exploiting the Stock Connect Programs in China which introduces the minority ownership of foreign institutions, we show that the selected firms significantly increase holdings of green patents, R&D expenses, access to green credits, and decrease carbon emissions. The effect is more pronounced if the foreign institutional investors are from countries with higher ESG standards. Analysis based on propensity-score-matched sample suggests that foreign institutional ownership sends a signal certifying the firm's green orientation, enabling it to access more capital and improve green performance. Overall, our study proposes foreign institutional holdings as a practical indicator of selecting genuinely green stocks.

Revolutionizing green business: The power of academic directors in accelerating eco‐innovation and sustainable transformation in China

AbstractThis study investigates the relationship between academic directors and corporate eco‐innovation in Chinese A‐listed firms in the context of the growing urgency of climate change. Based on the argument that academic directors bring advanced knowledge, skills, experience, and expertise to a corporate board and are more socially responsible and ethical, we hypothesized that academic directors would have a positive influence on corporate eco‐innovation. We also examine how this nexus is moderated by pollutant firms and firms having qualified foreign institutional investors (QFIIs). Our results suggest that academic directors have a positive and significant impact on corporate eco‐innovation. The findings remain robust even after employing alternate proxies for both independent and dependent variables, minimizing reverse causality and endogeneity concerns, and addressing self‐selection bias through the entropy balancing method. Additionally, our study reveals that the positive nexus between academic directors and eco‐innovation is more pronounced in pollutant firms and firms having QFIIs. This study contributes to the literature on corporate governance, eco‐innovation, and emerging markets by providing evidence of the positive influence of academic directors on eco‐innovation, highlighting the importance of their contribution to enhancing corporate governance mechanisms to promote environmentally friendly activities and sustainability practices. Furthermore, our findings offer insight into the role of QFIIs in strengthening the positive association between academic directors and eco‐innovation, suggesting that foreign investors can support and encourage firms to adopt environmentally friendly practices for long‐term benefits.

A study on impact of foreign institutional investment in Indian markets

Enabling the readers to understand the impact of the foreign institutional investment in Indian markets. This will enhance the readers understanding importance of FII in the growing economies like Indian financial market. This about the opportunities that are brought by foreign institutional investors to the Indian market. Study also enables the readers to understand the importance of FIIs and easy access of the capital for different businesses and startups.

스튜어드십 코드와 일본기업의 연구개발투자

Purpose: This paper explores the influence of both domestic and international institutional investors, recognized as emerging outside blockholders in Japanese firms, on R&D investment. The study aims to understand how these investors impact R&D spending, a crucial factor for sustainable growth, particularly in the context of the implementation of the Stewardship Code.
 Research design, data, and methodology: The analysis employed panel analysis on 105 manufacturing companies listed on Nikkei225 from 2014 to 2020. We used the intensity of R&D as the dependent variable, with institutional investors holding more than 3% of each company’s shares as the independent variable. By classifying institutional investors, we compared the results between domestic and foreign institutional investors.
 Results: The analysis revealed that outside blockholders had a significantly positive effect on R&D. However, when institutions were classified, different results emerged. While domestic institutional investors had a significant positive impact on R&D, foreign institutional investors did not yield statistically significant results. Additionally, the financial institution variable, acting as the control variable and related to insider investors, consistently demonstrated a significantly negative effect across all models.
 Implications: Despite foreign institutional investors dominating the Japanese stock market, it was found that domestic institutional investors have emerged as significant outside blockholders in each firm. Traditionally criticized as passive investors, domestic institutional investors are shown to influence and promote R&D for long-term growth, in line with the Japanese stewardship code. While foreign investors are often associated with potential decreases in R&D for short-term gains such as ROE and dividends, no significant evidence was found. Moreover, with increasing stake ratios, foreign investors have the potential to positively impact Japanese firms in the future.

R&D investments in emerging market firms: the role of institutional investors and board interlocks

Despite the increase in institutional investor shareholdings in emerging market firms, their impact on R&D investments has received scant attention in the literature. By integrating agency and resource dependence perspectives, we examine the role of different types of institutional investors and their interactions with board interlocks in shaping their preference for R&D investment in their portfolio firms. We test our hypotheses on a sample of 2,478 Indian firm‐year observations from 2005 to 2019, using various estimation techniques. Our results indicate that different categories of institutional investors have distinct preferences for R&D investment. Specifically, we find that ownership by both foreign institutional investors and mutual fund investors negatively impacts R&D investments in firms. While board interlocks positively moderate the impact of institutional investors such as banks and financial institutions and foreign institutional investors on R&D investments in firms, this moderation is negative in the case of mutual fund investors and R&D investments in firms. We contribute to the understanding of the determinants of R&D investments in emerging market firms, with a specific focus on institutional investor ownership and add to the nascent literature on the interaction between two forms of governance, i.e., ownership and board characteristics, in shaping this firm strategy.

Determinants of Institutional Ownership in the MENA Region

This study explores the main determinants of institutional ownership in the MENA region. Using a large sample of 262 listed companies across MENA countries, this study focuses on company and country characteristics that might explain institutional behavior. We attempt to answer the following questions: First, what are the main categories of institutional investors operating in MENA countries? Secondly, what factors drive institutional ownership? Results reveal a weak presence of institutional investors in the MENA region. Unlike foreign and passive investors, domestic and active institutional investors dominate the companies’ ownership. Such findings raise serious issues about how to attract foreign institutional investors. Results also suggest that value stocks appeal to institutional investors, whatever their origin (foreign or domestic) and kind (active or passive). Institutional investors look for large, profitable, and liquid companies that pay high dividends. They prefer investing in highly indebted companies as they consider debt an efficient mechanism to mitigate agency problems. Corporate governance and information disclosure are also crucial determinants of institutional ownership. However, foreign-domestic and active-passive institutional investors have different investment preferences. Our study would contribute to a better understanding of ownership endogeneity within an emerging context. Results would help professionals, managers, and policymakers to adopt appropriate reforms to offer an appealing business climate and attract a large base of institutional investors, not only foreign and active investors.

Do foreign institutional investors improve board monitoring?

Exploiting the global financial crisis of 2007–08 as an exogenous shock that resulted in a significant decline in the ownership of foreign institutional investors (FIIs) in the Indian equity market, we find evidence of a causal link between FIIs’ ownership and different dimensions of board monitoring. Specifically, the empirical results suggest that higher FIIs ownership leads to lower board size, busyness, network size, CEO power, CEO pay, and improved board diligence. However, we also document a negative link between FIIs’ ownership and board independence, indicating that FIIs do not view independent directors as effective monitors. In terms of implications, our results suggest that improved board monitoring, induced by higher FIIs’ ownership, leads to higher firm valuation and innovation activities.

A study on the Driving factors of Foreign Institutional Investment in Indian Stock Market (BSE)

India's stock market is essential to the country's economic progress. The market for stocks is an assembly point where investors, including residents and non-residents, may invest or withdraw money in the hope of seeing a capital increase. The stock market is an essential actor in the financial industry because it gives users and suppliers of financial resources a place to invest in company stocks. Examine the FII’s link with the stock market of India’s average monthly return. Monthly statistics were gathered for six years, from the beginning of 2016 to the end of 2021, to assess the impact of FII on the comeback of stock market of India. The relationship between the return of stocks and these variables was investigated using economic analysis.
 Every factor, such as the Sensex (BSE), and FII (both dependent and independent) are included in the analysis to check the stationary before being employed in the econometric analysis. The ADF test was used to assess the validity of the unit root test. The preceding study demonstrates that there is a causal link between the FII and the Sensex has been studied using correlation and the Granger causality test.

Feedback Trading and Its Implications for Return Autocorrelations in India During COVID

In emerging capital markets, feedback trading is a widely pursued strategy by investors. Such behavior may potentially lead to volatility and cause negative autocorrelation in market returns, especially during high volatility. In India, such a linkage has not been explored so far, though institutional investors have pursued feedback trading for the last two decades. Also, COVID-19 has led to higher volatility in the markets and might have altered investors’ behavior. This article focuses on finding whether feedback trading is still pursued by institutional investors in Indian equity markets post-COVID and also whether the presence of feedback traders exerts any influence on autocorrelations in market returns. Asymmetric GARCH models are employed to explore the linkage. Findings suggest that while foreign institutional investors continue to pursue positive feedback trading, as in the pre-pandemic period, domestic investors pursue negative feedback trading. However, in the post-pandemic period, as other types of trading became weak or perished, positive feedback traders have started dominating, leading to negative autocorrelation in market returns during heightened volatility. Evidence of negative autocorrelation was not present in the pre-pandemic period. Further, negative news leads to more volatility in returns. JEL Codes: F21, F32, G11

Can corporate environmental, social, and governance performance influence foreign institutional investors to hold shares? Evidence from China

AbstractWith the rise of environmental, social, and governance (ESG) investment concepts, foreign institutional investors have become increasingly concerned about corporate ESG performance. Based on data of China's A‐share listed companies from 2011 to 2021, we empirically find that corporate ESG performance enhances foreign institutional investors to hold shares. Economic policy uncertainty significantly reduces the impact of corporate ESG performance on foreign institutional investors' shareholdings. The mechanism analyses show that information asymmetry and corporate reputation are the two transmission channels for corporate ESG performance that influence foreign institutional investors to hold shares. Further analysis shows that companies with good ESG performance are prone to become heavy investments and long‐term shareholdings for foreign institutional investors. The heterogeneity analyses show that the effect of ESG performance on foreign institutional investors' shareholdings is more significant among firms that are not state‐owned, with high business risk and in heavily polluting industries.

Pledging of shares by controlling shareholders and implications for foreign institutional investors

Offering shares as collateral (share pledging) to avail of business or personal loans has increasingly been used as a financing tool by controlling shareholders in developing economies such as India. With the focus on protecting the rights of minority shareholders, pledging of shares has been subject to scrutiny as academicians, regulators, and corporate governance experts have highlighted the detrimental effects of share pledging on the firm. This study raises awareness about share pledging for uninitiated foreign institutional investors (FIIs) looking to invest in developing economies. The study highlights the conditions, viz. motivation to pledge, degree of ownership, and quantum of pledge, under which share pledging may be concerning and when it may benefit the FIIs. We distinguish between pledging under different conditions and the implications arising under the outlined scenarios for FIIs. Our analysis provides potential investors with a comprehensive overview of pledging and its possible consequences for the firm. The study urges investors to take a more nuanced view of pledging rather than paint all of it with the same negative stroke.

Foreign Institutional Investors and Corporate Green Innovation: Evidence from an Emerging Economy

ABSTRACT This study investigates the impact of foreign institutional investors (FIIs) on corporate green innovation. We manually collected data on foreign institutional ownership (FIO) from 34 international jurisdictions between 2009 and 2020. We find that FIO has a positive, robust, and causal effect on the green innovation practices of Chinese listed companies. Moreover, our heterogeneity analyses indicate that this positive effect is more pronounced for FIIs originating from jurisdictions exhibiting greater environmental consciousness of and advancements in green technology as well as for those FIIs committed to the United Nations—supported Principles of Responsible Investment. Furthermore, we provide evidence suggesting that environmental information disclosure and monitoring serve as potential mechanisms through which FIIs catalyze corporate green innovation.

Country-level heterogeneity in foreign institutional investment horizons and firm value

Extant literature on the influence of short- or long-term foreign institutional investors on corporate valuation and strategic decisions implicitly assumes their monitoring role to be homogeneous across all portfolio countries. This paper examines the valuation impact of country-level heterogeneity in foreign institutional investment horizons using a large sample from 32 countries. Our findings show that foreign institutional investors with longer country-level investment horizons enhance firm value, especially in countries with less effective investor protection and firms with higher information asymmetry and susceptibility to agency problems. The results also indicate that the country-specific informational scales attained through longer horizons within a portfolio country enable foreign institutional investors to bridge the information gap between themselves and local institutions. Overall, this study underscores the importance of recognizing the differential monitoring role played by foreign institutional investors across different countries within their portfolios.

Analysis of Variation in Foreign Inflows by Different Categories of Foreign Portfolio Investors

The liberalisation of Indian financial markets has smoothened the capital flows of international institutional investors, resulting in rising foreign investor participation in the domestic equity and debt markets. Since the reforms of the 1990s, India has become one of the favourite investment hubs of foreign institutional investors (FIIs) across the globe. The research aims to analyse the variation in contribution to foreign inflows by the three different categories of foreign portfolio investments (FPIs) and the determinants of inflows of the categories of FPIs. The study is based on the use of secondary data collected from the National Securities Depository Limited and the Securities Exchange Board of India. One-way ANOVA has been employed to examine the variation in inflows by different categories of FIIs. Autor regressive distributed lag model has been used to understand the factors determining the inflows of FPIs. The results of the study revealed that there exists variation in the inflows of investments among the different categories of FIIs. The variation in inflows by different categories into equity instruments was significant, while the inflows into debt instruments were not significant. Furthermore, the highest inflows were seen from the second category of FIIs. JEL Codes: C32, G2