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Essays on Financial Institutions
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In this dissertation, I study the role of a specific group of financial institutions, institutional investors, in the asset allocation process as well as in shaping corporate policies. The first essay investigates the role of institutional investors in affording flexibility to firms’ payout policy during periods of capital market stress. Treating the financial crisis as a systemic shock, I find that institutional ownership is positively associated with the likelihood of payout cuts during the crisis. The payout reduction is overwhelmingly driven by cuts in share repurchases and by the presence of quasi-index investors. I conclude that institutional shareholding is valuable because it allows firms to tap into an internal source of financing during times of systemic financial stress. The second essay exploits a regulatory feature governing foreign institutional investors (FIIs) in India to study the timing of increases in the firm-specific limit on aggregate FII shareholding for a cross-section of Indian companies. We find that controlling shareholders (promoters) exploit 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 severe under-performance in the long run, both in stock prices and operating performance. At the same time, there are no changes in board structure. Our study thus reevaluates the role of FIIs in markets characterized by an opaque information environment. The final essay focuses on the role of two specific classes of active institutional investors - mutual funds and hedge funds - and their contribution to the asset allocation process. In this study, I investigate the extent to which the use of private information explains the performance of actively managed investment funds. Specifically, we examine the relationship between the R2 measure from regressing mutual funds’ returns on pricing factors and future fund returns. Contrary to the argument which posits that low R2 is a proxy for skill, we instead propose that it represents private information advantages and provide evidence to support this claim.
Foreign Institutional Investors
Haque, Syed Imranul (2016). Essays on Financial Institutions. Doctoral dissertation, Texas A & M University. Available electronically from