Foreign institutional investor trading and future returns: evidence from an emerging economy

Abstract

This study presents evidence that Foreign Institutional Investor (FII) trades are negatively related to future stock returns. For our sample period, portfolios of stocks that are formed based on positive, zero, and negative FII quarterly net buying yield average quarterly returns of 1.6%, 3.8%, and 2.4%, respectively. This suggests that investing in stocks in which FIIs do not trade yields superior returns to those in which they trade. Further, their sells perform better than their buys. We employ panel regressions to document a significant negative relation between FII trading and future 3-month and 12-month returns after controlling for several firm characteristics. The poor performance is magnified when FIIs trade in small stocks and when they trade more frequently than average. We also find that their quarterly net buying is negatively associated with returns during subsequent earnings announcement dates. Further, their trades during the announcements also generate poor performance in the three-month post-announcement period.