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

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 frst sign of trouble. Using a bottom-up approach, we explore this possibility. We demonstrate the infuence of the frm-specifc 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 fnd 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 fnancial fundamentals of the companies to attract FII ownership.