Influence of foreign institutional holding on corporate risk-return profile: a panel quantile regression analysis

Abstract

The study investigates the influence of foreign institutional investment on the risk-return profile of firms. Corporate risk is analyzed as business risk and financial risk in this study. The impact of foreign institutional investor’s (FII) holding on business and financial risk taking behavior is studied on 174 listed non-financial firms in India using panel quantile regression methodology for a span of 20 years which include the pre and post 2008 financial crisis periods as well. Panel fixed effect model was found to be appropriate in this study The impact of FII holding is also studied through the distribution of the risk through panel quantile regression. The impact of FII holding on risk taking behaviour of the firms is studied primarily across high, average and low proportion of corporate risk. Overall FII holding has an inverse relationship with corporate risk taking behavior of firms. The positive impact of FII holding across all types of firms in terms of the risk-return profile indicates that their presence is long term and reduces risk taking behaviour of the corresponding firm. The implications of this study will be significant in regulating FII inflows and outflows to ensure discipline on the part of firm management in improving its risk-return profile.

Keywords:

• Foreign Institutional Investors
• corporate risk
• business risk
• financial risk
• firm profitability
• return on equity
• return on asset
• panel quantile regression

REVIEWING EDITOR:

• David McMillan, University of Stirling, United Kingdom

SUBJECTS:

• Economics
• finance
• business
• management and accounting

JEL:

• G32
• L25
• O16

Disclosure Statement

No potential conflict of interest was reported by the author(s).

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Notes

1 As per Bloomberg, as of March 2022, India ranked 5th in the entire world in terms of total market capitalization of all the listed entities. The total market capitalization of India stood at $3.2 trillion. India is the second largest emerging market in the list, following China.

2 Based on Hausman test, Panel Fixed Effect appears to be the appropriate model for the data set. Results are available upon request. Hence, Panel Fixed Effect model has been subsequently used to model the effect of Crisis period (Eqs. 5(5) $$\mathit{\text{CR}}{1}_{\mathit{\text{it}}}={\beta }_0+{\beta }_1\mathit{\text{FI}}{I}_{\mathit{\text{it}}}+{\beta }_2\mathit{\text{Siz}}{e}_{\mathit{\text{it}}}+{\beta }_3\mathit{\text{Leverag}}{e}_{\mathit{\text{it}}}+{\beta }_4\mathit{\text{Crisis}}+{\beta }_5\mathit{\text{Crisis}}\times {\mathit{\text{FII}}}_{\mathit{\text{it}}}+\epsilon$$(5) , 6(6) $$\mathit{\text{CR}}{2}_{\mathit{\text{it}}}={\beta }_0+{\beta }_1\mathit{\text{FI}}{I}_{\mathit{\text{it}}}+{\beta }_2\mathit{\text{Leverag}}{e}_{\mathit{\text{it}}}+{\beta }_3\mathit{\text{Siz}}{e}_{\mathit{\text{it}}}+{\beta }_4\mathit{\text{Crisis}}+{\beta }_5\mathit{\text{Crisis}}\times {\mathit{\text{FII}}}_{\mathit{\text{it}}}+\epsilon$$(6) ) and in Panel Quantile Regression (Eq. 7(7) $$Y_{\mathit{\text{it}}}=\sum _{j=1}^4{X}_{\mathit{\text{it}}}^{\prime }{\beta }_j{ϵ}_{\mathit{\text{it}}}^{\mathrm{*}}$$(7) ).

3 We are thankful to the anonymous referees for suggesting this section.

Additional information

Notes on contributors

Souvik Banerjee

Dr. Souvik Banerjee has keen interest in research and has presented research papers in many prestigious national and international conferences including prestigious conferences like First Corporate Governance Conference organized by IIM, Trichy, Yale Great Lakes Conference organized by Great Lakes Institute of Management, Chennai in collaboration with Yale University, the USA, etc. He had chaired a Technical Session in an international conference at IIM, Kozhikode. Some of the research papers are published in Scopus and ABDC Indexed journals. He has published many research papers in referred journals, in India, the UK, Malaysia, Singapore, Philippines. Dr. Banerjee has developed many case studies for class room discussion as well as executive education. He was previously associated with IBS Hyderabad as a faculty member.