We study the effect of foreign fund flows on asset prices by investigating the link between foreign institutional investor (FII) flows and stock returns in India. Stocks experiencing high innovations in order flow are associated with a permanent price increase, whereas stocks experiencing low innovations are associated with a partly-transient price decline. The differential abnormal return between high and low innovation stocks is significant, largely unrelated to firm characteristics, and increasing during periods of market stress. The findings are consistent with price “pressure” induced by FII sales, as well as information being revealed through FII purchases and FII sales.
|Journal||5th IGC-ISI India Development Policy Conference|