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Foreign Institutional Investors: Fair-Weather Friends or Smart Traders?

Author

Listed:
  • Hari Venkatesh

    (Indian Institute of Technology Kharagpur)

  • Jyoti Kumari

    (IBS Hyderabad (ICFAI Foundation for Higher Education))

  • Gourishankar S. Hiremath

    (Indian Institute of Technology Kharagpur)

  • Hiranmoy Roy

    (University of Petroleum and Energy Studies)

Abstract

We examine a theoretically robust but previously undocumented issue of what drives foreign portfolio investments into emerging markets. Foreign institutional investors (FIIs) are often blamed as fair-weather friends who pull out their investment at the first sign of trouble. Using a bottom-up approach, we explore this possibility. We demonstrate the influence of the firm-specific factors such as size, book to market ratio, the riskiness of the stocks, stock prices, dividend yield, liquidity, leverage, and earnings on the FII ownership. We find no evidence to show foreign investors as fair-weather friends. Instead, they are smart traders who follow a diligent investment strategy. We suggest reforms in corporate governance and improvement in financial fundamentals of the companies to attract FII ownership.

Suggested Citation

  • Hari Venkatesh & Jyoti Kumari & Gourishankar S. Hiremath & Hiranmoy Roy, 2021. "Foreign Institutional Investors: Fair-Weather Friends or Smart Traders?," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 19(2), pages 291-316, June.
    • Handle: RePEc:spr:jqecon:v:19:y:2021:i:2:d:10.1007_s40953-021-00233-3
    DOI: 10.1007/s40953-021-00233-3
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    More about this item

    Keywords

    FII; Equity research; Corporate governance; Financials; Portfolio investment;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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