Foreign Institutional Ownership and Its Impact on Investment Efficiency in Manufacturing Firms: Evidence from Indian Capital Market

Abstract

This article explores the impact of foreign institutional investor’s (FII) ownership on the investment efficiency of Indian manufacturing firms. In this article, unbalanced panel data is used, in total, 21,214 firm-year observations of 1,205 companies listed in Centre for Monitoring Indian Economy (CMIE) COSPI (CMIE Overall Share Price Index) are taken into account. The data range is from 2001 to 2019. This research article considers investment-investment opportunities sensitivity as the proxy for investment efficiency, where investment opportunities are measured Tobin’s Q. As per our findings FII’s ownership impacts investment efficiency in a negative way. It is further found that this inverse relationship between FII’s ownership and investment efficiency is more pronounced in resource abundant firms, compared to the resource constrained firms. In this study both fixed as well as random effect models are developed incorporating robust standard error, additionally system generalized method of moments (GMM) model as well as two step Heckman model are also used to check the robustness of the findings.

This study adds to the existing literature as a pioneering study on impact of FII’s ownership on firm’s investment efficiency in the context of India, a large emerging market economy.

Keywords

Investment efficiency foreign institutional investor investment opportunity resource constrain

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