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

Purpose There 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/approach The 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. Findings When 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/implications Evidence 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 implications There 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/value Unlike 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.

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).

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.