The rising proclivity among firms to amass cash and the influx of foreign flows in promoter-dominated Indian Inc. is a trend in development. In this backdrop, this study investigates the governance role of foreign institutional investors (FIIs) in determining the economic value of corporate cash resources in emerging markets. We report that FIIs strengthen the efficiency of cash assets in leading Indian firms. The effects amplify with a rise in ownership levels. Corroborating the global investor hypothesis, the results evidence that ‘foreignness’ of FIIs adds to their superior monitoring abilities, more so for firms facing deep agency costs and higher financial constraints, a peculiar feature of emerging markets. Importantly, these governance benefits persist during periods of high economic uncertainty, indicating that FIIs can act as reliable monitors when domestic institutions are weak. The results remain robust even after controlling for board and ownership variables. Possible concerns of endogeneity are addressed using generalized method of moments.
Mittal et al. (Mon,) studied this question.