Abstract

Using a regulatory feature that governs foreign equity investments in India, we analyze equity purchases and their timing by foreign institutional investors (FIIs). We find that controlling shareholders use their information advantage to sell overvalued equity to FIIs around valuation peaks. Despite the initial positive market reaction to greater anticipated FII shareholding, we find that firms that raise their FII limits underperform in the long run. Our study thus questions the effectiveness of FIIs in markets characterized by opaque information environments.