Empirical investigations of foreign equity investments in an emerging market

Student thesis: Doctoral Thesis

Abstract

This thesis examines foreign institutional (portfolio) investors'™ (FIIs or FIIs) influence on government policy, their trading behaviour, and their implications on firm-level board monitoring in a large emerging market.In the first empirical investigation, we examine the power of FIIs to directly influence the policy of host government. In a quasi-experimental setting, we find a strong negative stock market reaction to an exogenous policy shock that threatens to increase tax liability of FIIs in India. More importantly, the shock resulted in a daily market withdrawal of approximately 0.309 basis points of market capitalization for an average equity by FIIs. Further, the results also indicate that FIIs’ withdrawal has a disruptive effect on several aspects of the stock market including volatility, liquidity and prices. Finally, the effect of the shock seems to have a long-term detrimental effect as, after the tax threat is removed, FIIs do not re-enter the market with the same speed and volume of trading compared to the initial market withdrawal.In the second empirical investigation, we examine the information content of opportunistic and routine insiders’ trades in an emerging market and test whether foreign institutional investors (FIIs) exploit and mimic informative trades. We find that opportunistic trades translate into an incremental return of approximately 243 basis points in the following month of the trade, much higher than previously reported in developed markets. More importantly, by exploiting unique high-frequency trade-level transaction data, we find that FIIs mimic past opportunistic insiders’ buy trades and earn superior abnormal returns. In sum, this study implies that opportunistic insiders'™ trading in emerging markets enables FIIs to reduce their informational disadvantage.In the third empirical investigation, we explore whether FIIs improve board monitoring. Exploiting the global financial crisis of 2007-08 as an exogenous shock that resulted in a significant decline of FIIs’ ownership in the Indian market, we find evidence of a causal link between FIIs’ ownership and different dimensions of board monitoring. Specifically, the empirical results suggest that FIIs reduce board size,busyness, network size, CEO power, and CEO pay, and improve board diligence. However, we also document a negative link between FIIs'ownership and board independence, indicating FIIs may not view independent directors as effective monitors in this market.
Date of Award26 Sep 2019
Original languageEnglish
Awarding Institution
  • University Of Strathclyde
SponsorsUniversity of Strathclyde
SupervisorChandra Thapa (Supervisor) & Andrew Marshall (Supervisor)

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