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Foreign Institutional Investor Trading and Future Returns:

Evidence from an Emerging Economy

SUMMARY

This research provides evidence that there is negative relationship between future stock
returns and foreign institutional trade. Researchers took data of stock which was based on “+”,
“0” and “–“ FII net buying, whereas the stock returns on these FII buying were 1.6, 3.8, 2.4 %
simultaneously . This recommends the stocks can generate significantly higher returns where FII
do not trade moreover comparatively there performance of selling is better than buying.
Researchers after controlling several features of different firm’s record negative relationship
b/w FII and quarterly returns. Inferior performance of FII in small stocks was observed
specifically when it was traded frequently. Findings suggest Quarterly buying is adversely
affiliated with announcements of Earning dates and deficit performance of FII after the Post
announcement.

SUMMARY (INTRODUCTION)

Institutional investors make their investment with objective to earn profit for this purpose they
spend significant amount in acquiring information. This has led to the debate that whether the
“FII” are “Smart Money” makers? Limited number of researches was carried out to identify
whether the Institutions that invest in foreign countries were able to pick Stock successfully.
Some argue that being global firms and having sufficient resources and sophisticated expertise
they manages portfolio successfully. Different researches were carried out with mixed results,
but the main aim of this paper was to investigate the investing ability of FII in INDIAN stock
market which was considered as an Emerging Market. In INDIA to trade as an FII, registration
with SEBI is required. FII can be traded in two possible ways, trade on their own account and
trade on behalf of investor. Where the trade is carried out on behalf of foreign investor P-Notes
are issued, it indicates shares held by FII on behalf of FII and eliminates the need of registration
with SEBI. In our first test outcome revealed that if the FII has knowledge of future events they
can trade ahead of it. Second test was related to Earning announcement researcher correlate
the Post announcement period and announced unexpected earning and found Positive
correlation between the two. Stock returns on the quarterly based data were 1.6, 3.8 and 2.4
percent. To identify the poor performance we split the data into two Small/large firms and
frequent and less frequent trade, the results of one year were consistent with their assumption
that the returns of small firms will be negative. To know the reasons for the poor performance
of FII in Indian market they took median number of buying and selling transactions and found
out that poor performance of market is associated with excessive trading. Moreover the buying
of FII is not related to unexpected earning of next quarter whereas, net buying of stock is
adversely related to announcement of returns. The powerlessness to predict the stock returns
and low returns arising near the announcement of earning forces to believe that Indian market
lack information. In last according to the research paper in long run from 3 month to 1 year
period reversal occurs which focuses around dates of earning announcement. Subsequently the
buying and selling is attached with poor performance of market. The underperformance of
Indian market can be due to rational or behavioral.

Herding and Feedback Trading by Institutional and


Individual Investors
SUMMARY (ABSTRACT)

The results of this research reveal that there is a strong positive correlation between measured
returns and Institutional ownership. It can be either because of herding has greater impact on
prices or the impact of herding by individuals investors is not significant the other reason could
be more Positive feedback from institutional investors than individual investors. No solid
evidences were found to conclude that mean reversion in the examined period, their purchases
out class their sell. However institutional herding is positively related with steam stock and lag
returns.

SUMMARY (INTRODUCTION/LITERATURE)

Herding is an activity where the number of traders trade in a same way over a period of time
whereas feedback trading is a correlation between lag returns and herding. Both herding and
feedback trading has an ability to answer financial phenomena. There are two different views,
one is that as engagement is herding is possibly because of irrational but systematic
sentiments. Whereas the second view is institutional investors engage in herding due to agency
problem and on the basis of information impounded in market. At first the researchers
investigate the cross sectional relation between stock returns and institutional changes in
ownership in order to know the comparative importance of herding in listed securities.
Secondly in this research it was investigated how lag returns are linked with institutional
ownership and stock returns. Third purpose of this research was to differentiate impact of price
herding from previous period feedback trading which was done through trader type identified
transaction data in last post herding returns were evaluated as an evidence of systematic
pattern. The results of the research suggested that purchases of investor’s surprisingly
outperform their sales which were inconsistent with other searches. Positive correlation was
found between institutional changes and stock and lag returns, institutional investors are also
engage in feedback trading.