Dynamic Determinants of Foreign Portfolio Investment in Large-Cap Firms: Evidence From an Emerging Market

The focus of this paper lies on examining the drivers of foreign portfolio investors' (FPIs') investments in large-cap firms in India during the time period of 2010-2024. To do so, we utilize a panel data analysis by combining the variables related to firm-level factors, corporate governance, macroeconomic environment, and dynamic investment behavior to explain foreign investment decisions. For the purpose of analysis, we will employ pooled OLS, fixed effects, and random effects models and then run the Hausman test to choose between the two models. We estimate dynamic panel data by including the lag of dependent variables in our model. Our findings indicate that earnings quality has a positive and significant effect on FPIs' investment in the Indian market, implying the significance of financial transparency in encouraging foreign investors. Moreover, we find that promoter ownership and domestic institutions ownership are both negative and significant, signifying that high ownership concentration and presence of multiple domestic institutional investors deter FPIs from investing. Also, we see that macroeconomic variables are significant, emphasizing the importance of a stable economic environment for making investment decisions. Most importantly, in the dynamic model, FPIs exhibit persistence with the lag of FPI coefficient of around 0.78. Results show the existence of heteroskedasticity, serial correlation, and cross-sectional dependencies, which have been accounted for using robust estimations. All in all, it may be concluded that foreign investors give precedence to the quality of corporate governance and the stability and transparency of investments rather than short-term financial gains. This research provides an important contribution to academic literature, combining various factors into one theoretical model and highlighting the dynamics of FPIs' behavior