Institutional preference for corporate-governance and firm-characteristics: New evidence from India

This paper investigates the differential preferences towards corporate-governance and other firm-level characteristics by Domestic-Institutional-Investors (DIIs) and Foreign-institutional-investors (FIIs) in the Indian context. We use data across 25,065 firm-years on institutional holding and deploy a series of univariate tests, a two-stage Fama-Mcbeth regression and a discrete-choice-model for analysis. We substantiate our results from the main analysis using a series of robustness tests. Our results highlight some common preferences and dislikes among these institutional investors. Both FIIs and DIIs prefer larger firms with higher liquidity, which pay higher dividends and generate higher ROE. They both dislike expensive (high P-B) stocks and stocks with high variability in earnings. However, there are also some visible differences in FII and DII preferences with respect to firm-level traits like corporate-governance, age, Tobin's-Q and leverage. The institutional preferences are found to be sticky and do not change across market cycles. The findings could be of value to policymakers in India and, by extension, other emerging countries in understanding and regulating institutional inflows.