Foreign fund flows and stock returns: Evidence from India

Description

We study the impact of foreign institutional investor (FII) flows on stock returns in India. Using stock-level daily trading data for FII purchases and sales, we classify stocks into those experiencing abnormally high and low FII flow innovations. The findings show that stocks with high positive innovations are associated with a contemporaneous price increase that appears to be permanent, whereas stocks with low innovations experience a price decline that is partially transient and tends to reverse within a week. The differential abnormal return between high- and low-innovation stocks is statistically and economically significant relative to stock return volatility. This effect is largely unrelated to firm-specific characteristics and becomes more pronounced during periods of market stress. The results are robust in out-of-sample tests and are consistent with the presence of price pressure on stock returns induced by FII sales, as well as the role of FII trading in revealing information about underlying stock value.

Publication Date

1-1-2015

Publisher

International Growth Centre (IGC)

Keywords

Financial management, Cash flow, Foreign fund flows

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