Agency Costs and Foreign Institutional Investors in India

Indian Insitute of Management Calcutta Working Paper No. 548

27 Pages Posted: 11 Aug 2005

See all articles by Asish K. Bhattacharyya

Asish K. Bhattacharyya

Nonlinear Insights ; Shiv Nadar University; Shiv Nadar University

Sadhalaxmi Vivek Rao

Indian Institute of Management Calcutta

Date Written: March 2005

Abstract

Financial markets are the catalysts and engines of growth of any nation. Since its liberalization in 1991, India has initiated several steps to strengthen its financial system. The financial sector reforms undertaken by the Government of India and the Securities and Exchange Board of India (SEBI), over the last few years have augmented the magnitude of FDI and FII inflows. The FDI inflow for the FY ended 1991 is US$ 97 million and the corresponding figure for the FY 2004 (P) is US$ 4,675 million. The corresponding figures for FII inflows are US$ 6 million and US$ 11.377 billion, respectively. The remarkable increase in the FDI's and FII's is due to the friendly enabling environment, significant improvement in terms of the efficiency of the capital markets and the protection of the investors.

India, one of the biggest emerging markets, is currently an important destination for FDI and FII inflows. SEBI has undertaken important policy reforms to attract new investments into the country. This empirical study endeavors to find the effect of the contemporary changes in the corporate governance structures on the agency costs of the publicly traded companies; primarily to study the effect of FII shareholding on the agency costs of publicly traded companies. The results show that FII's are effective monitors in reducing the agency costs.

Keywords: Corporate Governance, Foreign Institutional Investment, Agency Costs, Promoter ownership, Asset Turnover Ratio, SEBI

JEL Classification: G18, G34, M41, N25

Suggested Citation

Bhattacharyya, Asish K. and Vivek Rao, Sadhalaxmi, Agency Costs and Foreign Institutional Investors in India (March 2005). Indian Insitute of Management Calcutta Working Paper No. 548, Available at SSRN: https://ssrn.com/abstract=773845 or http://dx.doi.org/10.2139/ssrn.773845

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Shiv Nadar University ( email )

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Sadhalaxmi Vivek Rao

Indian Institute of Management Calcutta ( email )

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