Exploring the Causality for FIIs’ Investment Deviations in India

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