Foreign Institutional Investors Research Articles

Macroeconomic factors and emerging equity market: A contextual analysis using quantile regression

This article examines the role of macroeconomic factors in influencing Indian stock market movements across different market conditions. The study is important for market participants and policymakers as macroeconomic factors may be the source of systematic risk that influences the stock market. We employ factor analysis as a solution to the multicollinearity issues associated with multiple macroeconomic factors. Using three statistical factors built from macroeconomic factors, we show how they impact the stock market, particularly during up and down market conditions. While the influence of foreign exchange rate, broad money supply, economic growth, wholesale inflation, global equity markets, and export is positive and stable across market conditions, an inverse relationship between contemporaneous bond yield and equity market movements is evidenced. Gold and foreign institutional investment inflows seem to exert an increasingly negative influence on market movements at extreme up-market conditions. These findings call for active intervention by policymakers to stabilise the market during extreme market conditions

Do Foreign Institutional Investors Promote Green Growth of Emerging Market Firms?

Do Foreign Institutional Investors Promote Green Growth of Emerging Market Firms?

Friend or Foe? Bilateral Political Relations and the Portfolio Allocation of Foreign Institutional Investors

Friend or Foe? Bilateral Political Relations and the Portfolio Allocation of Foreign Institutional Investors

Do Foreign Institutional Investors Drive Value-Enhancing CSR decisions? Evidence from Chinese Listed Firms

Do Foreign Institutional Investors Drive Value-Enhancing CSR decisions? Evidence from Chinese Listed Firms

The Moderating Effect of Earnings Management and Dividend Policy on Relationship Between Corporate Governance and Institutional Foreign Ownership

This study aims to examine the effect of corporate governance on institutional foreign ownership with earnings management and dividend policy as moderating variable. Previous research tends to be done in developed countries. In addition, prior research that examined the relationship between corporate governance and foreign institutional ownership is relatively inconclusive. Kim (2015) concluded that although some prior studies have found a correlation between corporate governance and institutional foreign ownership, there has been no research that explains the causality relationship. This study uses a corporate governance index that formed through the results of factor analysis test. The results of statistical tests indicate that corporate governance can be used as a good signal to pursue external parties that imply the company that has a good oversight mechanism. Interaction testing results between earnings management and corporate governance imply that foreign institutional investors tend to rely on corporate governance signals. In contrast, the interplay of dividend and corporate governance policies shows significant results. Therefore, it can be concluded that companies that have good corporate governance and dividend policies can reduce the conflict of interest between agents and principals tend to attract foreign institutional investors to invest in the company

대리인문제와 외부감시주체가 여성의 이사회 참여에 미치는 영향

This study examines the effects of agency problems and outside monitors on the participation of female directors on the board of directors. Analyzing 3,540 non-financial firm-year data listed on the Korea Stock Exchange from 2014 and 2018, we find that women’s participation on the board of directors increases in the case of non-owner managed firm with high agency problems between shareholders and managers. We also unveil that when the monitoring incentives of outside monitors such as outside directors, foreign investors and institutional investors increase, the participation of female directors on the board of directors is likely to increase. Furthermore, analyzing 368 non-financial firm-year data of female directors on the board of directors, we find that non-owner manager, affiliated firm of large business groups, the ratio of outside directors on the board of directors and the ownership of both foreign investors and institutional investors have a positive effects on the characteristics of female directors such as the existence of female outside directors, expertise, attendance rate and tenure. The test results of this study indicate that if either agency problems or monitoring incentives of outside monitors are higher, the participation of female directors on the board of directors is likely to increase.

The Effect of Managerial Share Pledges on the Cost of Debt

We examines whether share pledges by controlling shareholders influence a firm’s cost of debt. We also investigate whether the relationship between share pledges and the cost of debt stems from the managerial risk-taking incentives or pursuing the private benefits of controlling shareholders. We make three major findings. First, we find the cost of debt is higher in firms with share pledges than in firms without share pledges. Furthermore, we identify a positive relationship between the cost of debt and the level of share pledges. Second, we find that there is no increased corporate financial leverage or investment activities in firms with share pledges. Finally, our empirical evidence demonstrates that the positive relationship between share pledges and cost of debt is more pronounced for lower foreign institutional investor stakes or higher controlling shareholders ownership. Overall, the results indicate that share pledges by controlling shareholders negatively affect the cost of debt. However, the effect of share pledges on the cost of debt is differently influenced by a firm’s ownership structure. Our findings suggest that share pledges induce stockholder-bondholder conflict, and the bondholder requires more risk premium due to the decrease of firm value.

Does international experience of managers bring financing benefits? Evidence from the cost of equity capital

Using a sample of Chinese firms, this study examines whether and how managers’ overseas experience affects a firm’s cost of equity capital. We document a negative association between managers’ overseas experience and the cost of equity capital. Mechanism analyses indicate that companies with returnee managers have better information quality and lower systematic risk; more institutional investors, media reports, and analysts following; and higher stock liquidity, all of which lead to a lower cost of equity capital. Further analyses show that chief executive officers (CEOs) with foreign experience have a more significant impact on the cost of capital than non-CEO managers with foreign experience and that managers’ overseas work experience has a more significant impact on the cost of capital than their overseas education. We also find that the impact of managers’ overseas experience is more pronounced when that experience is gained in common law countries compared to code law countries but weaker for state-owned enterprises and firms that are cross-listed or have foreign institutional investors. Overall, the results suggest that managers’ knowledge, skills, and ethical values imprinted from overseas experience, plus eyeball effects from media and analyst attention, can reduce the cost of equity capital.

The effect of foreign institutional ownership on corporate tax avoidance: International evidence

We find that foreign institutional investors (FIIs) reduce their investee firms’ tax avoidance. We provide evidence that the effect is driven by the institutional distance between FIIs’ home countries/regions and host countries/regions. Specifically, we find that the effect is driven by the influence of FIIs from countries/regions with high-quality institutions (i.e., common law, high government effectiveness, and high regulatory quality) on investee firms located in countries/regions with low-quality institutions. Furthermore, we show that the effect is concentrated on FIIs with little experience in the investee countries/regions or FIIs with stronger monitoring incentives. Finally, we find that FIIs are more likely to vote against management if the firm has a higher level of tax avoidance.

What do foreign flows tell us about stock market movements in the presence of permanent and transitory shocks?

PurposeThere 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/approachThe 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.FindingsWhen 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/implicationsEvidence 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 implicationsThere 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/valueUnlike 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.

Earnings quality, foreign investor and dividends

This study discovers the relation between corporate governance factors and earnings quality and finds that increases in dividends and foreign ownership deter earnings management. The author shows that dividend increases and foreign ownership enhance earnings quality, but they appear to be substitutes in that role. In other words, as foreign ownership increases, the influence of dividends in increasing earnings quality decreases. Improving transparency through dividend increases and monitoring by foreign institutional investors are substitutes in preventing earnings management.

Towards better informed foreign institutional investment

Purpose This paper aims to review the latest management developments across the globe and pinpoint practical implications from cutting-edge research and case studies. Design/methodology/approach This briefing is prepared by an independent writer who adds their own impartial comments and places the articles in context. Findings Ownership concentration can make foreign institutional investors hesitant about investing in the firm. However, board financial expertise acts as a reassuring presence that counters information asymmetry and enables better informed investment decision-making. Originality/value The briefing saves busy executives and researchers hours of reading time by selecting only the very best, most pertinent information and presenting it in a condensed and easy-to-digest format.

Market discipline or rent extraction: Impacts of share trading by foreign institutional investors in different corporate governance and investor protection environments

Minority investors' reliance on market discipline can vary with different country-level investor protection and firm-level corporate governance environments, which affect both discipline and rent extraction incentives of foreign institutional investors (FIIs). Using data from 47 economies between 2009 and 2017, we find that firm value increases with FIIs aggressive trading but decreases with FIIs discreet trading. The positive and negative impacts of FIIs trading are strengthened when investor protection is stronger, but weakened when corporate governance is stronger. Our analysis enhances understanding of trade-offs of FIIs trading between discipline and rent extraction in different corporate governance and investor protection environments.

Does stock market liberalisation restrain corporate financialisation?

AbstractWe study the impact of stock market liberalisation through the Mainland China–Hong Kong Stock Connect (CHSC) program on the corporate financialisation of listed firms in Mainland China using the generalised difference‐in‐difference model in this paper. The empirical results show that implementing the CHSC program significantly reduces corporate financialisation of the listed firms in Mainland China by mitigating internal agency conflicts and enhancing external monitoring. Further analysis indicates that the inhibiting effect of stock market liberalisation through the CHSC program on corporate financialisation is more pronounced for firms without cross‐listing or qualified foreign institutional investors (QFII) ownership and firms with a more remarkable change of foreign ownership brought by the CHSC program.

The Informational Response of Different Investor Types on Futures Return Fluctuations: Evidence from Taiwan’s Index Futures Market

This article examines the price impact of different types of investors' trading activities in the Taiwan index futures market on the market, and explores the information roles of different types of investors. We find the trading volumes of different investors in the index futures market affect futures returns through information. The impact on index futures returns in the current period is small, showing the ability of foreign institutional investors to quickly respond to negative news and obtain information advantages. Further, from the MSE and QLIKE loss functions, individual investors use EGARCH(1,1), domestic institutional investors TGARCH(1,1), and foreign institutional investors GARCH(1,1). Further, the imbalance of buy and sell orders is suitable for the fluctuation of futures returns using EGARCH(1,1).

The influence of qualified foreign institutional investors on internal control quality: Evidence from China

This study aims to investigate whether qualified foreign institutional investors (QFIIs) improve companies' internal control quality to mitigate information asymmetry. By analysing a sample of 22,310 firm-year observations from Chinese listed companies between 2005 and 2017, we found that companies with QFIIs exhibit higher internal control quality and fewer internal control deficiencies. In particular, higher QFII ownership is associated with higher quality of internal control. Interestingly, QFIIs from high-governance-quality countries are more likely to improve the internal control system of their investee companies. Finally, the improvement in internal control quality attributed to QFIIs leads to better operating performance. Our results are robust to alternative measures of QFIIs, alternative proxies for internal control quality, and various controls for endogeneity issues.

Does Board Diversity Attract Foreign Institutional Ownership? Insights from the Chinese Equity Market

The study aimed to empirically investigate the impact of board diversity variables (age, gender, nationality, education, tenure, and expertise) on the investment preferences of foreign institutional investors in an emerging market, China. For this, sample data consisted of 1374 nonfinancial Chinese firms from 2009 to 2018. The study used OLS regression as a baseline regression, a fixed effect model to control omitted variable bias, and the two-step systems GMM model to control the endogeneity problem. The study revealed that board diversity variables (gender, nationality, education, and financial expertise) are positively associated with foreign institutional ownership in Chinese nonfinancial firms, implying that foreign institutional investors own a high percentage of Chinese nonfinancial firms with diversity of gender, nationality, education, and financial expertise. Age and tenure of board diversity, on the other hand, have little correlation with foreign institutional ownership. Further, the robustness regressions also confirmed the relationship between board diversity and foreign institutional ownership. This study made a unique attempt to provide empirical evidence that firms having diverse boards attract foreign institutional ownership by reducing asymmetric information.

Institutional investors and the value of excess cash holdings: empirical evidence from Pakistan

PurposeThis study examines the effects of foreign and domestic institutional investors on the value of excess cash holdings in the context of Pakistan where the institutional setting is broadly considered as non-friendly to outside shareholders due to family control.Design/methodology/approachA panel sample of 220 listed firms on the Pakistan Stock Exchange (PSX) was employed over the period 2007–2018. Data on institutional ownership are collected from the Standard & Poor’s (S&P) Capital IQ Public Ownership database, while the financial data are collected from Compustat Global. The study uses ordinary least squares (OLS) regression with year and firm fixed effects as the main econometric specification. Moreover, the application of models with alternative measures, high-dimensional fixed effects and two-stage least squares (2SLS) regression are also conducted for robustness.FindingsRobust evidence was found that unlike domestic institutional investors, which do not influence the value of excess cash holdings, foreign institutional investors positively affect the contribution of excess cash holdings to firm value. The positive effect on excess cash holdings' value is mainly driven by foreign institutions domiciled in countries with strong governance and high investor protection. Moreover, this effect is stronger in firms that are less likely to have financial constraints.Originality/valueThis study provides novel evidence on the effect of institutional investors on the value of excess cash holdings in an emerging market like Pakistan. It also adds to the literature by revealing that the effect of different groups of institutional investors on the value of excess cash holdings is not homogenous.

Investor sentiment and market dynamics: Evidence from index futures markets

ABSTRACT This study presents an investor sentiment proxy with a greater explanatory power in determining price changes in the Korean futures market and examines the effect of investor sentiment on futures price changes. We also consider how investor-trading behaviour affects the association between investor sentiment and futures prices. Our empirical results demonstrate that the multiple-variable method is appropriate for examining the explanatory power of investor sentiment in the KOSPI200 index futures market. Investor sentiment significantly affects futures price changes, indicating its important role in futures price dynamics. Futures market sentiment has a greater effect on futures price changes during a positive net position state period. Furthermore, we find that foreign institutional investors’ trading behaviour is positively related to changes in futures prices.

Study of Stock Market Management in Reference to Institutional Investment

The institutional investors, whether the DII (Domestic Institutional Investor) or FII (Foreign Institutional Investor) contribute to the growth and management of stock market. The stock market is very dynamic in nature and the volatility is prevalent across. It is important to understand the relation of different institutional investors on the stock market. Foreign institutional investors and Domestic institutional investors are two major sources from which the stock market receives its investment. Thereby, it is necessary to understand the cause and effect of these investments on the stock market. The flow of fund from the foreign investors is one of the reasons for the growth of Indian Stock Market. The cause-and-effect study gives us a better picture of the stock market movement and this study focuses on finding the same. The study will help investors and stockbrokers to understand the movement of the stock market in a better way. In this study, cause and effect between the FIIs, DIIs and Stock Market returns is analysed. The statistical tools used for analysis are Granger Causality test and Johansen Co-integration test. Both the statistical tool used are reliable and the expected results will be highly beneficial for the investors at large. The results shows that there is cause and effect relation between the FII and DII, but the co-integration between the FIIs, DIIs and stock market is absent. The study will contribute in understanding the behavior of stock market.