Foreign institutional investors and security returns: evidence from Indian stock exchanges

India liberalized its financial markets by opening its doors to foreign institutional investors in September, 1992. We study this landmark event, by examining the impact of trading of Foreign Institutional Investors on the major stock indices of India. First, we find that unexpected flows have a greater impact than expected flows on stock indices. Second, we find strong evidence consistent with the base-broadening hypothesis. Third, we do not find any evidence that foreign institutional investors employ either momentum or contrarian strategies. Fourth, our findings support the price pressure hypothesis. Finally, the claim that foreigners’ destabilize the market is not substantiated. Keywords

Financial development, corporate governance and cost of equity capital

This paper explicitly examines the interactive impact of country level legal and financial development, and firm level governance attributes on the cost of equity capital. Using a comprehensive sample of 7380 firm years drawn from 22 developed countries, we show that firm level governance attributes affect the cost of equity capital only in the Common Law countries with high level of financial development. Our study is the first to highlight the complementary effects of legal origin, financial development and firm level governance attributes in influencing the cost of equity capital

Natural disasters: blessings in disguise?

This study examines the impact of natural disasters on market returns and on several industries that are likely to be affected by the disasters. We find that different natural disasters have different impacts on the returns of the market and on those of industries. Our evidence suggests that while earthquake, hurricane and tornado could negatively affect market returns several weeks after the events, other disasters such as flood, tsunami and volcanic eruption may have limited impact on market returns. We also find that construction and materials industry is positively affected by natural disasters but nonlife and travel industries are likely to suffer when a natural disaster strikes

Does certification work in emerging markets? evidence from the Indian IPO market

There is inconclusive evidence regarding the economic value of certification in the context of IPOs in developed markets. Using a natural experiment of regulator mandated IPO grading requirement, we examine the effects of third-party certification in the Indian IPO market. We summarize our empirical results below. First, underpricing is unaffected by the grading process. Second, stock price informativeness as proxied by idiosyncratic volatility increases significantly due to IPO grading process. Third, retail and institutional subscription levels are significantly positively associated with IPO grades after controlling for other certification mechanisms such as underwriter reputation, group affiliation, analyst recommendation and venture capital backing. Finally, using a pseudo grading process we conclude that IPO grades are not mechanically derivable from publicly available information. In a nutshell, we use our unique setting to examine the usefulness of certification in emerging markets with institutional voids

Dividend reductions and signaling in an imputation environment

In contrast to the double taxation system prevailing in the U.S., Australian firms operate within an imputation tax environment with respect to dividend payments. We argue that the dividend imputation tax system increases the signaling potential of dividend reductions and our empirical findings strongly support this view. We find that the size of the dividend reduction is related to the tax credit status of the dividend. Abnormal changes in profitability are negative in the year following dividend reductions and are negatively related to the dividend reduction; similar signaling effects are found in terms of price reactions. The significance levels for the relations between abnormal change in profitability and dividend reductions, and price reactions and dividend reductions are statistically significantly stronger for dividends with associated tax credits. Overall, our study conclusively demonstrates that dividend reductions in Australia have strong signaling power and, as such, our results are at variance with the results obtained in the U.S

Order aggressiveness of institutional and individual investors

This paper investigates the factors determining the order aggressiveness of institutional and individual investors on the Australian Stock Exchange (ASX). The study also examines the changes in institutional and individual investors’ order aggressiveness following the removal of broker IDs on the 28th of November 2005. While investigating the order submission strategies of stocks sampled from large, medium and small capitalization groups, we document that the institutional and individual investors’ order aggressiveness responds similarly to the market depth and the bid-ask spread, but differently to the time left-to-trade (end of the day) and the order size. This difference in the order submission strategies employed by institutional and retail investors is more strongly pronounced in the post-transparent (anonymous) market. In addition, both groups of investors become less aggressive after the move to anonymity, with stronger results observed for individual investors

Theory of birefringence of nematic liquid crystals

A theory of the birefringence of nematic liquid crystals is developed taking into account the intermolecular potential energy arising from dipole-dipole, anisotropic dispersion, induction and repulsion interactions. The potential energy exhibits a dependence on molecular orientation and is expressible as - (u0 + u1 cosθ + u2 cos2θ + u4 cos4θ + u4 cos4θ + ...) where Theta is the angle which the long axis of the molecule makes with the uniaxial direction of the liquid crystal. The birefringence of the medium is evaluated in terms of the Boltzmann distribution of the oriented molecules. The theory explains the experimentally observed result that the temperature coefficient of the extraordinary index is large and negative whereas that of the ordinary index is small and positive. Analysis of the data on p-azoxyanisole and p-azoxyphenetole shows that dispersion and repulsion forces play a predominant role in determining the temperature variation of the birefringence. Assuming that the molecular librations in the liquid crystal can be represented by a system of harmonic oscillators, the rms librational amplitude is evaluated for p-azoxyanisole from recent measurements of the ultrasonic velocity. The increase in the rms amplitude with temperature in the nematic range is found to be in good agreement with that obtained directly from the experimental data on birefringence

Investor sentiment, profitability and offer price band: evidence from the Indian IPO market

Offer price band is a crucial component of the book building process in the Initial Public Offering process of a firm. Extant research shows that investor sentiment plays a prominent role in IPO markets. We therefore suggest that investor sentiment plays a significant role in determining the offer price range. The determinants of offer price band have not been studied in the IPO literature. We fill this lacuna by studying the Indian IPO market. We hypothesise that investor sentiment will positively influence offer price band. We also posit that the profitability of a firm will be inversely related to the offer price band. Our empirical tests support these hypotheses