End Term Mba

Exploring the Causality for FIIs’ Investment Deviations in India
Amiya K. Sahu[1], Amrita Chakraborty[2]
Abstract
As an emerging market, India has been attracting foreign investments since 1993. In the equity market, Foreign Institutional Investors’ (FIIs’) net investments have grown at a CAGR of 21% since then. What causes the attraction? Several studies (Griffin, 2004; Sehgal and Tripathy, 2009; Bodla and Kumar, 2009) have empirically found that FII investments have a significant bearing on Indian markets at an aggregate level. Do they monitor company fundamentals and enjoy information asymmetry? Can other investors follow FIIs?
We investigate association between institutional (FII) ownership and stock fundamentals. This study uses a large sample balanced panel data model and support for our hypothesis testing for the period of 2001-2010. We find that the quarterly changes in FII holding has unidirectional and bidirectional causal interactions with lagged indicators between FIIs’ holding and company fundamentals. Hence, if FIIs’ investments are mocked (retail investors), one may have a good recipe for profits. Our results can also imply that FIIs can have significant contribution in controlling agency problem and adding to existing literature on shareholder activism.
Key words: India, Foreign Institutional Investor shareholding, Company fundamentals, Granger causality, Agency problem.
Corresponding Author

Amiya K. Sahu
Assistant Professor
Goa Institute of Management
Poriem, Sattari, Goa - 403505
Tel: [phone]; Hand Phone: [phone]
Email: [e-mail]
Registration No: 1109
Exploring the Causality for FIIs’ Investment Deviations in India

1. Introduction

Until the 1980s, India focused on self-reliance and there was disinclination towards foreign investment. Ever since the economic reforms were launched in the early 1990s, Indian markets were opened to attract foreign investments in different formats. Foreign investments

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