1 s2.0 S1042443122000919 Main 2

J. Int. Financ. Markets Inst.
Money 80 (2022) 101613
Contents lists available at ScienceDirect
Journal of International Financial Markets,

Institutions & Money
journal homepage: www.elsevier.com/locate/intfin
Foreign controlling shareholders and corporate investment

Anushka Agarwal , Neeru Chaudhry *
Department of Management Studies at Indian Institute of Technology Delhi, India
A R T I C L E I N F O A B S T R A C T
JEL Classification: We examine how firms with foreign controlling shareholders (promoters) affect corporate in
G31 vestment in India. Using a large sample of publicly listed non-financial firms, we find that firms
Keywords: with foreign controlling shareholders invest less and, as their ownership increases capital ex
Controlling shareholders penditures decrease. The negative effect of foreign controlling shareholders on corporate in
Promoters vestment is stronger among firms with a high-quality information environment and firms prone to
Foreign investors
agency problems. We note that firms with foreign controlling shareholders invest efficiently,
Capital expenditure
invest in projects involving the expansion of existing facilities (rather than establishing new
Investment efficiency
units), and their projects are larger than firms with no foreign controlling shareholder.
1. Introduction
An extensive body of research in corporate finance studies the effects of ownership structure on a variety of corporate outcomes (for
example, Jensen and Meckling, 1976; Morck et al., 1988; Stulz, 1988; Shleifer and Vishny, 1997). The agency literature, built upon
these studies, stresses how agency conflicts and the mechanisms to check for such problems manifest distinctly in different markets.
The capital markets in developed economies such as the US and the UK are characterized by dispersed ownership along with a
managerial model of the corporation. However, the markets in emerging economies such as India present a unique challenge due to the
prevalence of concentrated ownership (Bertrand et al., 2002). Although the participation of small shareholders has steadily increased
in the Indian equity market since the stock market liberalization of 1991, the ownership structure is still highly concentrated among a
few families and founder members, who have significant control over corporate decision-making.
According to the Organization for Economic Co-operation and Development (OECD) report on the ownership structures of Indian
corporates, on average, almost half of the listed companies are owned by the controlling shareholders (promoters) (OECD, 2020). The
term promoter is commonly used in India to refer to controlling shareholders. In contemporary ownership structures outside India, the
term controlling shareholders is used in this regard. The definition and characteristics of promoter ownership are explained in more
detail in Section 2. The concentrated ownership among promoters has important implications for the effectiveness of corporate
governance mechanisms. For instance, the Kotak Committee Report of 2017 on corporate governance (Securities and Exchange Board
of India, or SEBI, 2017) notes,
“There are instances of promoters carrying out actions that are favourable to them but detrimental to the interests of minority share
holders. This has affected confidence in India Inc.”
It is not clear whether the prevalence of controlling shareholders in the form of promoters in the Indian capital market benefits
minority shareholders. On the one hand, since promoters have long-term interests in the company, they can offer stability and
* Corresponding author at: Department of Management Studies, Indian Institute of Technology Delhi, New Delhi 110 016, India.
E-mail addresses: Anushka.Agarwal@dms.iitd.ac.in (A. Agarwal), Neeru.Chaudhry@dms.iitd.ac.in (N. Chaudhry).
https://doi.org/10.1016/j.intfin.2022.101613
Received 27 January 2022; Accepted 18 July 2022
Available online 26 July 2022
1042-4431/© 2022 Elsevier B.V. All rights reserved.
A. Agarwal and N. Chaudhry Journal of International Financial Markets, Institutions & Money 80 (2022) 101613
proprietary oversight to ensure efficiency (Anderson and Reeb, 2003). On the other hand, promoters can also potentially inflict costs of
extraction on minority shareholders for their personal benefit (La Porta et al., 2000), with a negative impact on firm value (Claessens
et al., 2002). Thus, the net influence of controlling shareholders on corporate decisions is ambiguous and provides motivation to
conduct this study.
Although previous literature argues that controlling shareholders give rise to principal-principal conflicts (Shleifer and Vishny,
1997), there is evidence that foreign investors curb such locally generated conflicts and accelerate governance reforms (Lang et al.,
2003; Aggarwal et al., 2011). The opening up of the Indian economy to foreign investors in recent decades provides a research op
portunity to explore foreign ownership as a crucial variable of the firm’s ownership structure. Indian firms with access to foreign
capital and technology are documented to be better monitored due to the presence of foreign owners (Khanna and Palepu, 2000). In
transition economies like India, foreign controlling shareholders may play a crucial role in impacting investment decisions, further
motivating us to study their role in such context.
The objective of our study is to gain a better understanding of the influence that foreign controlling shareholders exert over
managers in terms of capital investment decisions. We define foreign controlling shareholder firms as those in which there is at least
one foreign controlling shareholder (FRGNCTRL-firms). Firms without any foreign controlling shareholder are referred to as
NONFRGN-firms. Further, we seek to provide evidence on whether foreign controlling shareholders align their interests with minority
shareholders or act in their own interests. The motivation for this study derives from the scant and inconclusive evidence with respect
to the influence of foreign controlling shareholders on corporate behavior in the emerging markets such as India. The studies on US
firms do not provide an opportunity to detect the effects of large ownership on capital expenditure levels as the ownership landscape of
the country exhibits a relatively small concentration (Claessens et al., 2002).
The theoretical prediction that foreign controlling shareholder ownership will reduce investment is based on the evidence provided
by Harford et al. (2018), who find that long-term investors reduce investment but increase shareholder value. Their evidence high
lights the role controlling shareholders play in curtailing managers’ empire-building behavior. There is also some evidence that
suggests that high levels of institutional ownership, particularly quasi-indexer ownership, lead to larger payouts and lower investment
due to better governance (Gutiérrez and Philippon, 2018). Moreover, Gompers et al. (2003) document that firms with better gover
nance levels exhibit lower capital expenditure levels and reduced acquisition activity.
Using a sample of Indian corporations, we study and provide evidence about the effects of foreign controlling shareholdings that is
difficult to observe in developed economies like the US or the UK. The extant literature indicates that concentrated ownership, a crucial
feature of emerging markets, may potentially lead to efficient monitoring and governance mechanisms (Shleifer and Vishny, 1986).
For instance, Japanese financial keiretsu firms present a concentrated ownership system similar to India due to their elaborate cross-
holdings of debt and equity, which serves as a mechanism of effective corporate control (Berglöf and Perotti, 1994). China is another
fastest-growing emerging market in the world that has exhibited, in recent decades, a sharp increase in foreign ownership and their
potential role in disciplining managers (Han et al., 2022). Therefore, our study can be replicated in other markets with similar reg
ulatory environments, financial market development, and ownership structures as exhibited in the Indian markets. Moreover, using a
single emerging market of India in our research design provides an added advantage of better control on data quality that allowed us to
comprehensively examine the effects of key institutional factors on several issues while holding the other factors constant (Fan et al.,
2011). This would not have been possible in a cross-country study.
Our sample consists of 28,175 firm–year observations from 3,129 unique firms for the sample period from 2001 (the financial year
starting on April 1, 2000, and ending on March 31, 2001) to 2020 (the financial year starting on April 1, 2019, and ending on March 31,
2020).1 We find that firms with foreign controlling shareholders invest less and, as their ownership increases, capital expenditures
diminish. We mitigate endogeneity concerns by performing instrumental variable and difference-in-differences estimations. The
negative effect of foreign controlling shareholders on capital expenditure persists even after controlling for ownership by domestic
controlling shareholders and institutional investors, and presence of foreign institutional investors.
In further analysis, we observe that the negative effect of foreign controlling shareholders on capital expenditures is more pro
nounced among firms with better information quality (large firms, firms with more liquid stocks, and firms with good accrual quality),
firms more prone to agency problems (firms with more cash holdings, firms operating in a less competitive environment, and less
financially constrained firms), and young firms.
We extend our discussion by investigating whether FRGNCTRL-firms invest efficiently. We find that ownership by foreign con
trolling shareholders is associated with more efficient investments in the form of reductions in underinvestment and overinvestment.
Additionally, we use project-level data to demonstrate that, compared to NONFRGN-firms, FRGNCTRL-firms are more likely to expand
existing investment projects than to open new units and their projects are larger. We also observe that FRGNCTRL-firms spend more on
research and development (R&D) than NONFRGN-firms. However, R&D spending diminishes as the equity stakes held by foreign
controlling shareholder increases. We observe no significant influence of foreign controlling shareholders on acquisitions.
This paper makes several important contributions to the corporate finance literature. Firstly, there is mixed evidence relating to the
impact of ownership by controlling shareholders on corporate investment. For example, Edmans (2009) suggests that ownership by
transient blockholders increases long-term investment, while Anderson et al. (2012) show that controlling shareholders reduce such
investment. We contribute to the finance literature that empirically examines the association between ownership type and corporate
investment by studying the unique setting of Indian firms. Our results are consistent with the ‘management shirking’ hypothesis
1
Most companies in India follow a financial year from April 1 to March 31.
2
(Aggarwal and Samwick, 2006) in that we find that ownership by foreign controlling shareholders reduces investment. We further
document that foreign controlling shareholders invest efficiently. Secondly, literature on controlling shareholders in emerging market
economies demonstrates their crucial influence on various firm policies and performance (Claessens et al., 2000; Sarkar and Sarkar,
2000; Anderson and Reeb, 2003; Yeh and Woidtke, 2005). We contribute to this literature by showing that foreign controlling
shareholders play an important role in monitoring firms by significantly impacting firms’ investment behavior in Indian markets.
Prior literature provides ambiguous evidence on whether reduced capital expenditure levels benefit the firm in the long-term
(Harford et al., 2018). To this end, we extend our discussion by studying the impact of foreign controlling shareholders on invest
ment efficiency, investment under different firm characteristics and, lastly, investment project characteristics. This discussion brings to
light that foreign controlling shareholders invest in value-creating projects. This further strengthens the monitoring hypothesis in the
context of foreign investors, who are responsible for the export of “good governance” practices (Aggarwal et al., 2011). Moreover, it
complements studies that relate poor governance with greater capital expenditures and acquisitions (Harford et al., 2008; Richardson,
2006).
We also contribute to the growing literature on foreign ownership (Lang et al., 2003; Aggarwal et al., 2011), which demonstrates
the key role foreign controlling shareholders play as corporate governance mechanisms, especially in emerging markets. It has not
been possible to draw such implications from the studies on developed economies which have been researched extensively. Together
with our paper, the existing evidence (Li et al., 2011; Boubakri et al., 2013; Chen et al., 2017) indicates large heterogeneity in the effect
of foreign owners on corporate policies and performance. Thus, our findings also present an opportunity to recognize the importance of
foreign ownership heterogeneity and further scrutinize their varied contributions to local stock markets.
Moreover, our study contributes to the extant literature on international financial markets as it focuses on cross-border ownership
by foreign controlling shareholders and can meaningfully guide government policy in the context of capital market openness and
capital mobility. Our findings provide useful insights for regulators interested in improving corporate governance mechanisms for
minority shareholders. The extant literature provides ample evidence of how improved governance practices induce a reduction in
corporate investment and ‘empire-building’ by managers (Morck et al., 1990; Lang et al., 1995; Harford et al., 2018). Therefore, our
results will indicate that foreign controlling shareholders are another source of good governance in emerging economies.
Lastly, our work complements previous studies in India that, until now, studied the effects of controlling shareholders by analyzing
their control rights to measure the level of concentration. Previous literature concerning the impact of ownership structures in India
mainly involves analyzing the performance of firms affiliated with diversified business groups and firms unaffiliated with such groups
(for example, Khanna and Palepu, 2000; Bertrand et al., 2002; Jameson et al., 2014). Our study uses the framework of promoter
ownership to measure the influence of controlling shareholders over investment decision-making, as promoters present a unique
ownership identity that is an amalgamation of ownership and control.
The remainder of the paper proceeds as follows. In Section 2, we discuss the regulatory framework with respect to promoter
ownership in India. In Section 3, we review the related literature and develop our hypotheses. Sections 4 and 5 discuss our data and
methodology, respectively. The results of our empirical analysis are described in Section 6, where we also conduct a number of tests to
check the robustness of our results. Lastly, Section 7 concludes the paper.
2. Promoter ownership in Indian companies
The feature that distinguishes the ownership structure in Indian capital markets from those in other countries is the presence of
promoters and non-promoters (OECD, 2020). Essentially, promoters are a group of individuals or institutions that established a
company and have majority control over it by virtue of their stake and/or management positions. Other shareholders include outside
minority shareholders. Since 2001, the average proportion of shares owned by promoters has been stable, at around 50 % (OECD,
2020). Among the various promoter categories, individuals and corporates remain the dominant promoter categories for all listed
companies; however, the significance of foreign promoters is notably greater for the top 500 listed Indian companies compared to all
listed firms.
The definition of a promoter is wide-ranging. According to Section 2(69) of the Companies Act of 2013, a promoter is defined as “a
person who has been named as a promoter in the prospectus or is identified by the company in the annual return filed every year.” This
definition also includes a person(s) who has control over the affairs of the company, either directly or indirectly, whether in the ca
pacity of a shareholder, director, or otherwise. In addition, a promoter exercises considerable influence over the board. The Issue of
Capital and Disclosure Requirements regulations of SEBI also provide a similar definition for promoters, along with substantial ob
ligations that they must fulfill (SEBI, 2009).2 These include a 20 % minimum shareholding in the post-issue share capital of the
company and a lock-in restriction of three years on such shareholdings (SEBI, 2018). This policy ensures that promoters have ‘skin in
the game’, which is essential, given their relative dominance in the ownership structure.
In 2021, the SEBI passed a memorandum to reclassify promoters and promoter groups as the ‘person in control’. The regulator
attributed this shift to the changing investor landscape in Indian markets due to the emergence of institutional investors and private
equity investors, who have controlling rights similar to those of promoters.
2
SEBI is the regulator of the capital markets in India.
3
2.1. Foreign controlling shareholders
The increasing ownership by foreign and non-resident promoters in Indian listed companies can be attributed to the continuous
efforts of the government to amend existing laws to attract more investment from foreign entities. For example, the Reserve Bank of
India (RBI) introduced the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regu
lations, 2013, as an effort in this direction. The new regulation allowed foreign promoters (or controlling shareholders) to easily
increase their equity stake through Indian registered brokers (RBI, 2013). Such policy changes increase the ownership proportion of
foreign controlling shareholders, playing a crucial role in accelerating local governance reforms. Moreover, such promoters are usually
skilled and sophisticated investors who can easily influence firm policies.
Cronqvist and Fahlenbrach (2008) point out that not all large shareholders have homogeneous investment and governance styles.
Moreover, they present the influence versus selection hypothesis in the context of blockholder effects on corporate policies. Some
blockholders influence the firm’s policies through the voting process and proposals, and others may carefully select those firms to
invest in that already follow the “good policies” based on their preferred beliefs. The identification of large shareholders thus has a
significant implication for the empirical analysis of our study.
Foreign promoters in India, by definition, are such foreign entities that are present during the firm’s incorporation process and also
dominate the firm’s management. Therefore, it is more likely that such shareholders fall in the category of those who can influence a
firm’s policies as opposed to those who strategically select firms that follow “good policies”.
3. Theoretical motivation and related literature
The extant literature in corporate finance attempts to identify the factors that determine the level of corporate investment (for
example, see, Larcker, 1983; Fazzari et al., 1988; Griner and Gordon, 1995). In a perfect capital market, as envisioned by Modigliani
and Miller (1958), there exist no market frictions, and managers invest as long as the marginal benefits of such investment exceed its
marginal costs and maximize shareholder wealth. However, in real markets, the existence of information asymmetry between insiders
and outside shareholders and agency costs due to the separation of ownership and management impact firms’ investment behavior
(Stein, 2003).
Jensen and Meckling (1976) suggest that ownership structure impacts corporate value through its influence on investment. Their
study is based on the postulation of principal–agent conflict that arises due to conflicts of interest between principals (owners) and
agents (managers), agency conflicts which can be overcome or at least reduced by allocating ownership rights to insiders. However,
Jensen (1986) argues that managers are prone to empire building by investing excessively in acquisitions and capital expenditures
because of the private benefits they enjoy by controlling large firms. Morck et al. (1988) present two conflicting hypotheses with
respect to the impact of managerial ownership on firm value. First, the convergence-of-interests (or alignment) effect suggests that
increases in firm valuation are in the interest of insiders as the proportion of shares they hold increases. Second, the entrenchment
effect postulates that managers tend to pursue their own benefits since the threat of proxy fights or takeovers declines as their
shareholdings increase. Cho (1998) observes a non-monotonic relation between insider ownership and corporate investment. Edmans
(2009) notes that the presence of blockholders can induce managers to undertake investment opportunities that increase firm value in
the long run.
These seminal papers have motivated several studies to empirically examine the impact of managerial ownership on investment.
Most studies provide evidence consistent with the management shirking hypothesis, which states that managers tend to evade
overseeing new investment projects. Aggarwal and Samwick (2006) document that managers tend to underinvest unless they are
incentivized to do so. In contrast, Griner and Gordon (1995), using a subset of Fortune 500 firms for their study, find that insider
ownership does not impact the level of capital expenditure. However, these studies focus on insider ownership with respect to
managerial ownership and overlook the impact of controlling shareholders.
Few studies have tried to establish a link between the presence of controlling shareholders and corporate investment. Anderson and
Reeb (2003) find that family firms perform better than non-family firms as a result of family ownership, which helps reduce managerial
opportunism without incurring severe losses for other stakeholders. This evidence is consistent with the ‘efficient monitoring’ by
controlling shareholders and suggests that minority shareholders benefit from their presence. Anderson et al. (2012) extend this
discussion to explore the influence of family ownership, where the family can exert substantial control over a firm’s investment policy.
Their findings suggest that firms with controlling shareholders commit fewer resources to investment activities than non-family firms.
La Porta et al. (1999) point out that amongst the 27 rich countries in their sample, 64 per cent of large corporations have controlling
shareholders. In large corporations, the dominant form of agency problem is between outside investors (principal) and controlling
shareholders (principal) (Shleifer and Vishny, 1997), rather than management-shareholders conflict. Principal–principal agency
conflicts manifest differently than principal-agent conflicts. Villalonga and Amit (2006) refer to such conflicts as agency problems,
wherein controlling shareholders indulge in the expropriation of minority shareholders by advancing personal motives at the expense
of firm performance. The authors add that minority shareholders may tolerate such expropriation at their expense because firms with
higher stakes of controlling shareholders are also linked to larger dividend payouts. La Porta et al. (2000) discuss how insiders,
including managers as well as controlling shareholders, expropriate minority shareholders. In contrast, Kester (1992) points out that in
Japanese and German corporations, reliance on cross-shareholdings, family control, and close monitoring by key stakeholders allows
the firm to exploit market incentives and fosters transactional efficiencies. Unlike the governance system in the US, the contractual
governance systems in these countries also lower the potential occurrence of large-scale takeovers.
The evidence from emerging economies on how controlling shareholders influence corporate behavior is mixed. For instance,
4
Wiwattanakantang (2001) finds that family and foreign-investor controlled Thai firms have a better corporate performance, relative to
the firms with no controlling shareholders. In contrast, Claessens et al. (2000) find that family-controlled firms in East Asian economies
are most likely to face agency conflicts due to the separation between control and ownership, such separation leads to the concen
tration of control or voting rights, which enables controlling shareholders to influence corporate decision-making. Yeh and Woidtke
(2005) perform an empirical analysis using a sample of 251 publicly listed firms in Taiwan, which has weak investor protection and
high concentrated ownership relative to the US market. The authors find evidence supporting greater agency problems and stronger
entrenchment effects in the case of firms whose boards are dominated by controlling shareholders.
Khanna and Palepu (2000) study 1,309 Indian firms for the year 1993 and find that firms affiliated with highly diversified business
groups have higher firm valuations than unaffiliated firms. The authors suggest that such business groups have better access to foreign
capital and technology, are monitored more effectively by virtue of concentrated ownership, and have better access to the internal
capital market. Chen et al. (2017) document that foreign institutional ownership is negatively associated with investment but posi
tively impacts investment efficiency. Foreign owners are better equipped to collect and process information (Lang et al., 2003) and can
therefore efficiently mitigate problems of information asymmetry and agency conflicts.
In countries with weaker investor protection, foreign institutional investors play a significant role in driving positive changes in
firm-level governance (Aggarwal et al., 2011). Sarkar and Sarkar (2000) study a sample of Indian firms to determine the impact of
different types of large shareholders on firm value. They find that an increase in foreign equity ownership positively impacts firm
value. This is because foreign controlling shareholders have greater access to both capital and better quality information, enabling
them to monitor managers more effectively (Lang et al., 2003; Aggarwal et al., 2011). Bebchuk et al. (2000) contend that the presence
of controlling shareholders necessitates the constitution of non-electoral corporate governance mechanisms since the incentive
problems of both ownership by large blockhlolders and dispersed owners may exist under such an ownership system. These studies
thus suggest that the presence of foreign controlling shareholders is a critical corporate governance mechanism that may potentially
exert a profound impact on corporate investment.
Based on the above discussion, we hypothesize that the presence of foreign controlling shareholders leads to better monitoring of
mangers, and hence results in reduced capital expenditure. The hypotheses are formally stated as follows:
H1a: Firms with foreign controlling shareholders invest less compared to similar firms with no foreign controlling shareholder.
H1b: As ownership by foreign controlling shareholder increases, capital expenditure reduces.
Albuquerue and Wang (2008) argue that controlling shareholders can extract a higher level of private benefits in countries with
weak investor rights, especially in emerging economies where poor governance leads to overinvestment and empire-building.
Emerging economies such as India are characterized by concentrated ownership in the form of greater rights by controlling share
holders. Bertrand et al. (2002) argue that controlling shareholders tunnel funds out of the firm through excessive compensation
packages, share dilution, asset leasing, guarantees to other companies’ borrowings, and so on, particularly in emerging economies
(Johnson, La Porta et al., 2000). Jameson et al. (2014) assert that in India, the presence of controlling shareholders on the board is
detrimental to firm value, which further worsens with increases in promoter ownership. Moreover, Gillian and Starks (2003) observe
that since domestic institutional investors are loyal to the local firms and their existing business relationships, they are more tolerant of
the management’s actions that may potentially harm shareholders’ interests compared to foreign institutional investors. Thus, we
propose the following two hypotheses:
H2a: Capital expenditure increases as ownership by domestic controlling shareholder increases.
H2b: In firms with foreign controlling shareholders, capital expenditure increases as ownership by domestic shareholders increase.
Gompers et al. (2003) demonstrate that poorly governed firms tend to engage in large inefficient investments as managers try to
avoid the “collapse of the empire” through increased investment and acquisition activity. Harford et al. (2018) investigate the impact
of long-term investors on a broad set of corporate policies and find that long-term investors reduce investment and curtail managers’
empire building. Similarly, Gutiérrez and Philippon (2018) provide evidence that, in the US, high levels of institutional ownership,
particularly quasi-indexer ownership, lead to lower investment due to better governance. We present the following two hypotheses
relating institutional investors and capital expenditure.
H3a: Capital expenditure decreases as ownership by institutional investors increases.
H3b: In firms with foreign controlling shareholders, capital expenditure decreases as ownership by institutional investors
increases.
The presence of foreign institutional investors in the Indian capital market is especially notable during 2002–2007 (OECD, 2020).
This growth can be attributed to the rapid development of primary and secondary markets in India around that period. Although both
foreign controlling shareholders and foreign institutional investors may enjoy similar informational advantages, the extent of influence
of the latter over corporate decisions understandably falls short. This is because foreign institutional investors have less control rights
than foreign controlling shareholders and, thus, less ability to influence corporate decision-making, including investments. The equity
investments by all institutional investors in a firm is subject to an overall limit of 24 % (SEBI, 1995). Therefore, we hypothesize that
foreign institutional investors may not have significant influence over corporate investments.
H4a: The presence of foreign institutional investors will not significantly influence capital expenditure.
H4b: The presence of foreign institutional investors will not influence how foreign controlling shareholders affect capital
expenditure.
Based on our discussion earlier in this section, firms with foreign controlling shareholders are better monitored and have fewer
agency problems. We expect investment efficiency to improve as ownership by foreign controlling shareholders increases. On the other
hand, we expect investment efficiency to deteriorate as ownership by domestic controlling shareholders increases as such firms are
likely to experience more agency problems. We propose the following two hypotheses:
5
Table 1
Summary Statistics by Year.
This table presents sample distribution by year. Columns (1) - (5) report the number of observations (N), and mean and median foreign controlling shareholder
ownership (FRGNPROM_OWN), and capital expenditure to total assets ratio (CAPEX) for FRGNCTRL-firms, respectively. Columns (6) - (8) report the number of
observations, and mean and median CAPEX for NONFRGN-firms, respectively. FRGNCTRL (NONFRGN) firms are those which have at least one (none) foreign
controlling shareholder. The sample period for this study is from 2001 (financial year beginning on April 1, 2000 and ending on March 31, 2001) to 2020 (financial
year beginning on April 1, 2019 and ending on March 31, 2020).
(1) (2) (3) (4) (5) (6) (7) (8)
FRGNCTRL-Firms NONFRGN-Firms
Year N FRGNPROM_OWN (%) CAPEX (%) N CAPEX (%)
Mean Median Mean Median Mean Median
2001 220 31.274 29.740 5.233 3.251 698 6.187 3.608

2002 230 30.373 27.265 4.578 2.657 738 5.607 2.827
2003 240 29.305 26.000 4.604 2.960 800 5.387 2.961
2004 236 28.357 25.425 6.073 3.394 870 6.065 3.108
2005 248 27.602 23.136 7.696 4.800 975 7.575 3.923
2006 243 27.049 22.893 8.257 5.339 1045 9.290 5.597
2007 326 21.946 13.950 9.613 6.239 1045 10.727 7.008
2008 323 23.485 14.135 9.420 6.786 1142 9.827 6.357
2009 327 23.370 15.110 8.168 5.457 1256 8.199 4.822
2010 318 22.967 14.505 5.864 3.773 1273 6.718 3.830
2011 330 23.704 16.431 6.724 4.220 1340 7.135 4.305
2012 336 22.004 13.650 6.606 4.462 1366 6.679 4.156
2013 301 21.355 13.760 5.147 3.358 1372 5.967 3.193
2014 275 21.718 14.470 4.954 2.892 1312 5.036 2.688
2015 264 21.236 13.680 4.242 2.349 1258 4.227 2.235
2016 284 21.234 13.665 4.024 2.506 1213 4.163 2.153
2017 279 21.351 14.070 4.806 2.532 1279 4.555 2.417
2018 270 20.291 11.730 5.061 2.817 1293 4.863 2.656
2019 260 21.024 11.181 5.175 3.320 1350 4.750 2.554
2020 236 23.749 15.460 4.328 2.534 1004 4.450 2.670
Fig. 1. Foreign Controlling Shareholder Ownership This figure presents annual mean and median equity ownership held by foreign controlling
shareholders in FRGNCTRL-firms, defined as those firms which have at least one foreign controlling shareholder. The sample period for this study is
from 2001 (financial year beginning on April 1, 2000 and ending on March 31, 2001) to 2020 (financial year beginning on April 1, 2019 and ending
on March 31, 2020).
6
Fig. 2. Corporate Investment This figure presents annual mean and median capital expenditure to total assets ratio for FRGNCTRL-firms and
NONFRGN-firms. FRGNCTRL (NONFRGN) firms are those which have at least one (none) foreign controlling shareholder. The sample period for this
study is from 2001 (financial year beginning on April 1, 2000 and ending on March 31, 2001) to 2020 (financial year beginning on April 1, 2019 and
ending on March 31, 2020).
Table 2
Summary Statistics by Industry.
This table presents sample distribution by industry. Columns (1) - (5) report the number of observations (N), and mean and median foreign controlling shareholder
ownership (FRGNPROM_OWN), and capital expenditure to total assets ratio (CAPEX) for FRGNCTRL-firms, respectively. Columns (6) - (8) report the number of
observations, and mean and median CAPEX for NONFRGN-firms, respectively. FRGNCTRL (NONFRGN) firms are those which have at least one (none) foreign
controlling shareholder. The sample period for this study is from 2001 (financial year beginning on April 1, 2000 and ending on March 31, 2001) to 2020 (financial
year beginning on April 1, 2019 and ending on March 31, 2020).
(1) (2) (3) (4) (5) (6) (7) (8)
Industry FRGNCTRL-Firms NONFRGN-Firms
FRGNPROM_OWN CAPEX (%) CAPEX (%)

(%)
N Mean Median Mean Median N Mean Median
Accommodation and Food service activities 111 27.057 22.270 6.211 2.865 442 6.612 4.200
Administrative and support service activities 25 42.381 40.000 2.465 1.870 52 4.846 2.832
Agriculture, Forestry and Fishing 50 32.251 31.420 3.369 2.129 327 6.989 3.483
Arts, entertainment and recreation – – – – – 55 6.532 2.521
Construction 247 20.674 9.090 5.456 2.301 1536 3.041 0.975
Education 4 27.572 36.079 15.322 0.076 52 6.583 3.605
Electricity, gas, steam and air conditioning supply 27 41.996 58.250 5.686 2.560 177 6.107 3.435
Human health and social work activities 39 5.137 1.845 10.500 6.378 186 10.614 7.645
Information and communication 475 25.665 19.810 6.319 3.314 1241 6.703 3.634
Manufacturing 3990 23.513 15.543 6.422 4.082 15,623 6.748 3.835
Mining and quarrying 46 28.720 25.600 4.256 2.816 198 7.368 4.333
Other service activities 5 34.512 46.130 1.067 0.252 24 7.409 5.537
Professional, scientific and technical activities 38 28.803 19.765 4.526 2.331 166 3.903 0.959
Public administration and defense; compulsory social security – – – – – 1 7.035 7.035
Transportation and storage 119 29.234 25.740 6.397 3.589 265 9.367 6.697
Water supply; sewerage, waste management and remediation activities – – – – – 2 1.294 1.294
Wholesale and retail trade; repair of motor vehicles and motorcycles 370 22.038 10.840 3.717 1.368 2280 4.665 1.932
7
Table 3
Descriptive Statistics.
This table presents summary statistics for the variables used in this study. CAPEX is the capital expenditure divided by the beginning of year book value of total
assets, FRGNPROM is one for foreign controlling shareholder firms and zero otherwise, FRGNPROM_OWN is the percentage equity held by foreign controlling
shareholders, FIRMSIZE is the natural logarithm of the book value of total assets, TOBINQ is the natural log of Tobin’s Q, CASHFLOW is operating cash flow divided
by total assets, LEV is calculated as long-term debt divided by total assets, and DIVIDEND is the dividend paid divided by total assets. The sample period for this study
is from 2001 (financial year beginning on April 1, 2000 and ending on March 31, 2001) to 2020 (financial year beginning on April 1, 2019 and ending on March 31,
2020).
Panel A: This panel presents the summary statistics for the variables used in this study.
(1) (2) (3) (4) (5) (6)

N Mean Median 25th Percentile 75th Percentile Std Dev
CAPEX 27,821 6.287 3.443 1.155 8.196 7.887

FRGNPROM 28,175 0.197 0.000 0.000 0.000 0.398
FRGNPROM_OWN 5546 23.883 16.689 4.080 40.540 22.398
FIRMSIZE 28,175 7.793 7.669 6.522 8.931 1.726
TOBINQ 28,175 0.336 0.224 0.057 0.516 0.420
CASHFLOW 28,175 0.067 0.068 0.013 0.125 0.100
LEV 28,175 0.351 0.323 0.164 0.494 0.245
DIVIDEND 28,175 0.009 0.002 0.000 0.012 0.014
Panel B: This panel presents Pearson correlation coefficients. Statistical significance at the 5 % level is indicated by *.
(1) (2) (3) (4) (5) (6) (7)

CAPEX FRGNPROM FRGNPROM_OWN FIRMSIZE TOBINQ CASHFLOW LEV
CAPEX (1)
FRGNPROM (2) − 0.004
FRGNPROM_OWN (3) − 0.014* 0.691*
FIRMSIZE (4) − 0.024* 0.112* 0.078*
TOBINQ (5) 0.154* 0.118* 0.139* 0.323*
CASHFLOW (6) 0.194* 0.047* 0.041* 0.054* 0.161*
LEV (7) 0.084* − 0.087* − 0.120* 0.083* − 0.280* − 0.140*
DIVIDEND (8) 0.143* 0.129* 0.125* 0.154* 0.457* 0.242* − 0.260*
Panel C: This panel presents the results from tests of difference in means and medians for the FRGNCTRL-firms and NONFRGN-firms. The FRGNCTRL (NONFRGN)
firms are those which have at least one (none) foreign controlling shareholder. Statistical significance at the 1, 5, and 10 % level is indicated by ***, **, and *,
respe4ctively.
(1) (2) (3) (4) (5) (6)

FRGNCTRL- NONFRGN- Difference in Means Difference in Medians
Firms Firms
Mean Median Mean Median – (3) – (4)
CAPEX 5.848 3.044 5.771 3.395 0.076 − 0.350***

FIRMSIZE 7.697 7.558 8.182 8.093 − 0.485*** − 0.535***
TOBINQ 0.311 0.203 0.435 0.320 − 0.124*** − 0.116***
CASHFLOW 0.065 0.066 0.076 0.076 − 0.012*** − 0.011***
LEV 0.361 0.336 0.308 0.269 0.054*** 0.067***
DIVIDEND 0.008 0.001 0.012 0.005 − 0.005*** − 0.004***
H5a: Investment efficiency increases as the foreign controlling shareholder ownership increases.
H5b: Investment efficiency decreases as the domestic controlling shareholder ownership increases.
3.1. Data
The data for the study are sourced from the Prowess dx database, maintained by the Centre for Monitoring Indian Economy (CMIE).
Our sample includes all Indian companies that are listed on the Bombay Stock Exchange and/or the National Stock Exchange of India.
This study covers the period from 2001 (the financial year beginning on April 1, 2000, and ending on March 31, 2001) to 2020 (the
financial year beginning on April 1, 2019, and ending on March 31, 2020). We exclude all firms belonging to the financial services
industry because government regulations potentially impact ownership structure and corporate investments in this sector. We further
drop observations of missing data required to calculate our key variables. Our final sample includes 28,175 firm–year observations for
3,129 Indian companies.
Table 1 presents the sample distribution by year for both firms with foreign controlling shareholders (FRGNCTRL-firms) and firms
with no foreign controlling shareholder (NONFRGN-firms). Approximately 20 % of the firm–year observations in our sample belong to
FRGNCTRL-firms. The number of FRGNCTRL-firms ranges from a minimum of 220 in 2001 to a maximum of 336 in 2012.
The average level of ownership by foreign controlling shareholders fell from 31 % in 2001 to 22 % in 2007 and has since remained
in the range of approximately 20–24 %. Fig. 1 presents this information in graphical form. For both FRGNCTRL and NONFRGN-firms,
the capital investment ratio (CAPEX) follows an increasing trend until the financial year 2007 and a downward trend afterward. This
downward trend can be attributed to the global financial crisis. Corporate investment has remained relatively stable in the last five
years of our sample period. The mean CAPEX for NONFRGN-firms is slightly higher than for FRGNCTRL-firms. This information is
8
A. Agarwal and N. Chaudhry
Table 4
Effect of Foreign Controlling Shareholder Ownership on Corporate Investment.
This table presents OLS regression results in which dependent variable is capital expenditure divided by total assets (CAPEX). FRGNPROM is one if there are foreign controlling shareholders and zero otherwise,
FRGNPROM_OWN is the proportion of shares owned by foreign controlling shareholders, FIRMSIZE is the natural logarithm of the beginning of the year book value of total assets, TOBINQ is the natural log of Tobin’s Q,
CASHFLOW is operating cash flow divided by total assets, LEV is calculated as total debt divided by total assets, DIVIDEND is dividend paid divided by total assets, and LAG_CAPEX is one year lagged CAPEX. In Column (10),
FRGNPROM is split into four levels based on the percentage equity held by foreign controlling shareholders. All regressions include industry and year fixed effects (FE). t-statistics calculated using robust standard errors and
clustered at the firm level are reported in parentheses. ***, **, and * indicate 1, 5, and 10 % significance levels, respectively. The sample period for this study is from 2001 (financial year beginning on April 1, 2000 and ending
on March 31, 2001) to 2020 (financial year beginning on April 1, 2019 and ending on March 31, 2020).
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Foreign Controlling Shareholder Dummy Foreign Controlling Shareholder Ownership Only Foreign Controlling Shareholder Firms Foreign Controlling
Shareholder
Baseline Controlling for Clustering Baseline Controlling for Clustering Baseline Controlling for Clustering
Ownership
regression lagged CAPEX standard errors by regression lagged CAPEX standard errors by regression lagged CAPEX standard errors by
Breakpoints
firm and year firm and year firm and year
FRGNPROM − 0.006 − 0.004 − 0.006 − 0.001 0.000 − 0.001

(-3.622)*** (-3.315)*** (-2.925)*** (-0.394) (0.126) (-0.337)
FRGNPROM_OWN − 0.022 − 0.016 − 0.022 − 0.019 − 0.012 − 0.019
(-3.427)*** (-3.805)*** (-3.472)*** (-2.860)*** (-2.983)*** (-2.877)***
FRGN_PCT (0 – 10 − 0.001
%)
(-0.413)
FRGN_PCT (10–26 − 0.006
%)
(-1.854)*
9
FRGN_PCT (26–51 − 0.014
Journal of International Financial Markets, Institutions & Money 80 (2022) 101613

%)
(-5.103)***
FRGN_PCT (>51 − 0.009
%)
(-2.522)**
FIRMSIZE − 0.003 − 0.002 − 0.003 − 0.003 − 0.002 − 0.003 − 0.003 − 0.002 − 0.003 − 0.003
(-6.447)*** (-6.351)*** (-5.039)*** (-6.484)*** (-6.388)*** (-5.063)*** (-3.487)*** (-3.314)*** (-3.864)*** (-6.470)***
TOBINQ 0.034 0.020 0.034 0.034 0.020 0.034 0.034 0.017 0.034 0.034
(17.002)*** (14.040)*** (9.608)*** (17.149)*** (14.261)*** (9.755)*** (8.795)*** (6.544)*** (9.269)*** (17.082)***
CASHFLOW 0.118 0.059 0.118 0.118 0.059 0.118 0.130 0.069 0.130 0.118
(18.142)*** (11.788)*** (14.584)*** (18.131)*** (11.753)*** (14.565)*** (9.366)*** (6.516)*** (8.425)*** (18.166)***
LEV 0.039 0.000 0.039 0.038 − 0.000 0.038 0.034 − 0.002 0.034 0.039
(12.143)*** (0.148) (5.948)*** (12.003)*** (-0.074) (5.835)*** (5.081)*** (-0.427) (5.153)*** (12.033)***
DIVIDEND 0.189 0.010 0.189 0.186 0.008 0.186 − 0.025 − 0.094 − 0.025 0.190
(3.380)*** (0.264) (2.903)*** (3.343)*** (0.216) (2.861)** (-0.275) (-1.564) (-0.267) (3.403)***
LAG_CAPEX 0.389 0.388 0.428
(43.426)*** (43.418)*** (22.952)***
CONSTANT 0.036 0.028 0.036 0.037 0.029 0.037 0.035 0.023 0.035 0.037
(6.099)*** (7.146)*** (5.318)*** (6.226)*** (7.291)*** (5.403)*** (3.227)*** (3.376)*** (3.527)*** (6.213)***
INDUSTRY FE YES YES YES YES YES YES YES YES YES YES
YEAR FE YES YES YES YES YES YES YES YES YES YES
N 28,175 27,821 28,175 28,175 27,821 28,175 5,546 5,499 5,546 28,175
Adj-R2 0.149 0.287 0.149 0.150 0.288 0.150 0.153 0.321 0.153 0.150
presented in graphical form in Fig. 2.

Table 2 presents the sample distribution by industry. Our sample consists of firms from 17 different industries. The manufacturing
sector accounts for more than half of the sample. The average ownership by foreign controlling shareholders is minimum for the Health
and Social Work industry (approximately 5 %) and maximum for the Administrative and Support Services sector (about 42 %). For
FRGNCTRL-firms, the Education sector has the maximum average CAPEX of about 15.3 %, while, for NONFRGN-firms, the Health and
Social Work industry does, at 10.6 %. The lowest average CAPEX for FRGNCTRL-firms is for Other Services (1.067 %), and the cor
responding figure for NONFRGN-firms is 7.4 %.
In Table 3, Panel A, indicates the summary statistics for all the variables in the study. For the full sample, the mean (median) CAPEX
is 6.3 % (3.4 %). For FRGNCTRL-firms, the mean (median) level of ownership held by foreign controlling shareholders is approximately
24 % (17 %). Panel B reports the Pearson correlation coefficients for all the variables in the main analysis. The variable CAPEX is
negatively correlated with the presence of foreign controlling shareholders, as well as with the level of equity ownership held by
foreign controlling shareholder. This evidence is consistent with the hypothesis that FRGNCTRL-firms invest less than NONFRGN-
firms.
Panel C of Table 3 compares key firm variables for FRGNCTRL and NONFRGN-firms. The univariate analysis shows that the mean
CAPEX is not significantly different across these two groups of firms. The median CAPEX is lower for FRGNCTRL-firms than for
NONFRGN-firms. Additionally, FRGNCTRL-firms are smaller, have fewer growth opportunities, exhibit a lower cash flow ratio, and
have greater financial leverage and a lower ratio of dividends to total assets relative to NONFRGN-firms.
4. Research methodology
To estimate our first hypothesis (H1a) that FRGNCTRL-firms invest less than compared to similar NONFRGN-firms, we employ
ordinary least squares (OLS) method on the following baseline regression equation:
CAPEX i,t+1 = α0 + β 1 FRGNPROM i, t + β2 FIRMSIZEi, t + β3 TOBINQi, t + β4 CASHFLOW i, t + β5 LEV i, t + β6 DIVIDENDi, t

(1)
+ Industry Dummies + Year Dummies + εi, t
where, for firm i and year t, CAPEX is the level of capital investment divided by the beginning of the year book value of total assets,
and FRGNPROM takes the value of one for FRGNCTRL-firms and zero for NONFRGN-firms.
We control for factors that could affect the relation between foreign controlling shareholders and capital expenditure (Myers, 1977;
Salinger and Summers, 1983; Fazzari et al., 1988). To account for potential differences in investment activities due to firm size, we
control for firm size (FIRMSIZE), measured as the natural logarithm of the firm’s total assets at book value. To control for growth
opportunities, we include Tobin’s Q (TOBINQ), defined as the market value of total assets divided by the book value of total assets. We
also control for operating cash flow (CASHFLOW) and dividends paid (DIVIDEND), both scaled by total assets, as our proxies for
financial constraints. The financial leverage of the firm is measured by the ratio of total debt to total assets (LEV). All variable defi
nitions are provided in the Appendix.
The financial position of a firm at the beginning of the year (that is, at the end of year t) would impact its investment in the year t +
1, therefore, all right-hand side variables, including our main explanatory variable FRGNPROM, are lagged by one year. We winsorize
all continuous variables at the top and bottom 1 % percentile. We also include industry and year dummies in the model to control for
industry and year fixed effects. We report standard errors corrected for heteroscedasticity and clustered at the firm level.
5. Empirical results
5.1. Main results
Table 4 presents the results obtained by estimating the regression model (1). Column (1) shows that the coefficient on FRGNPROM
is negative and statistically significant at the 1 % level, suggesting that FRGNCTRL-firms invest less compared to NONFRGN-firms. In
economic terms, this result indicates that with respect to the sample mean, CAPEX is 9.544 % lower for FRGNCTRL-firms than for
NONFRGN-firms.3 This result provides support to our first hypothesis H1a that the presence of foreign controlling shareholders has a
negative effect on capital expenditure. The results also show that capital expenditure decreases with firm size and increases with
growth opportunities, operating cash flow, and financial leverage.
We conduct a number of other tests to check the robustness of our main finding. Column (2) of Table 4 controls for lagged values of
CAPEX in the regression model, to control for the possibility that the current CAPEX level is determined by the past level of in
vestments. In Column (3), we report our results after clustering the standard errors by firm as well as year. The coefficients on
FRGNPROM in both Columns (2) and (3) are negative and statistically significant at the 1 % level. These results are in line with the
baseline results reported in Column (1).
To test Hypothesis H1b that CAPEX decreases as the proportion of equity held by foreign controlling shareholders increases, we
include FRGNPROM_OWN in the regression model (1). These results are presented in Columns (4) to (6) of Table 4. Column (4) shows
3
This figure (9.544) is calculated as the coefficient on FRGNPROM (-0.006) in Column (1) in Table 4 divided by the sample mean CAPEX
(6.287%) reported in Table 3 Panel C.
10
Table 5
Two-Stage Least Squares Regression.
This table presents results from the two-stage least square estimation. FRGNPROM is one if there are foreign controlling shareholders and zero otherwise,
FRGNPROM_OWN is the proportion of shares owned by foreign controlling shareholders, FIRMSIZE is the natural logarithm of the beginning of the year book value
of total assets, TOBINQ is the natural log of Tobin’s Q, CASHFLOW is operating cash flow divided by total assets, LEV is calculated as total debt divided by total
assets, DIVIDEND is the dividend paid divided by total assets, IV1 indicates the level of equity held by the foreign controlling shareholders in the first year a firm
appears in the full sample, IV2 (IV3) indicates the industry-average number (ownership) of foreign controlling shareholders, excluding the firm itself. The results
from diagnostic tests for the validity of instruments are reported in Panel B, along with their respective p-values. All regressions include industry and year fixed
effects (FE). t-statistics calculated using robust standard errors and clustered at the firm level are reported in parentheses. ***, **, and * indicate 1, 5, and 10 %
significance levels, respectively. The sample period for this study is from 2001 (financial year beginning on April 1, 2000 and ending on March 31, 2001) to 2020
(financial year beginning on April 1, 2019 and ending on March 31, 2020).
Panel A: This panel presents results from 2SLS estimation.
Endogenous Variable: FRGNPROM Endogenous Variable: FRGNPROM_OWN
(1) (2) (3) (4)
First Stage Second Stage First Stage Second Stage
FRGNPROM − 0.009
(-2.980)***
FRGNPROM_OWN − 0.032
(-3.026)***
FIRMSIZE 0.023 − 0.002 0.003 − 0.003
(0.001) *** (-4.004)*** (0.001)** (-3.183)***
TOBINQ 0.013 0.030 0.048 0.035
(0.007) * (14.821)*** (0.006)*** (8.597)***
CASHFLOW − 0.028 0.108 − 0.041 0.129
(0.024) (16.310)*** (0.023)* (9.046)***
LEV − 0.0607 0.037 − 0.037 0.032
(0.011) *** (11.090)*** (0.010)*** (4.643)***
DIVIDEND 0.782 0.143 − 0.777 − 0.002
(0.204) *** (2.451)** (0.149) *** (-0.022)
IV1 1.823 0.734
(0.022) *** (-0.012)***
IV2 − 0.053
(0.015) ***
IV3 − 0.627
(0.231) ***
CONSTANT 0.00474 0.015 0.131 0.038
(0.0276) (2.651)*** (0.028)*** (3.055)***
INDUSTRY FE YES YES YES YES
YEAR FE YES YES YES YES
N 20,942 20,942 5,194 5,194
2
Adj-R 0.287 0.138 0.494 0.151
Panel B: This panel presents the results from the diagnostic tests that confirm the validity of the instrument variables.
F-statistic (p-value) 47.16 (0.000) 2032.17 (0.000)

Sargan’s χ 2 (p-value) 1.512 (0.218) 2.086 (0.149)
Bassman’s χ 2 (p-value) 1.510 (0.219) 2.072 (0.150)
that the coefficient on FRGNPROM_OWN is − 0.022 and statistically significant at the 1 % level. In terms of economic significance, for
FRGNCTRL-firms, a one-standard deviation increase in ownership by foreign controlling shareholders leads the CAPEX to decrease by
approximately 0.5 per cent.4 Similar results are observed if we control for the lagged values of CAPEX as shown in Column (5). In
Column (6) we cluster standard error by firm and year, and find results consistent with our baseline model. These results provide
support to our Hypothesis H1b that as the equity held by foreign controlling shareholders increases, corporate investment reduces.
Additionally, we examine the relationship between foreign controlling shareholder ownership and capital expenditure by per
forming the empirical analysis on the sample of foreign controlling shareholder firms. The results are presented in Columns (7) to (9) of
Table 4. The coefficient on FRGNPROM_OWN is negative and statistically significant at the 1 % level across Columns (7) - (9) as well.
These results further support our Hypothesis H1b that foreign controlling shareholder ownership negatively influences corporate
investment.
Some of the influential works in the past, including Morck et al. (1988) and Cho (1998) have demonstrated that managerial
ownership has a non-linear relationship with firm value and investment. A recent study on Indian corporations by Gupta and Bedi
(2020) observe a negative association between total controlling shareholder ownership and corporate cash holdings but a U-shaped
association between foreign controlling shareholder ownership and corporate cash holdings. They interpret the initial decrease and
subsequent increase in cash holdings in foreign promoter corporations as potential aversion of such firms towards the distribution of
4
This figure is calculated as the coefficient on FRGNPROM_OWN multiplied by the standard deviation of FRGNPROM_OWN (22.398) reported in
Table 3 Panel A.
11
cash in the form of dividends to avoid taxes on repatriation. By contrast, there has been substantial evidence with respect to foreign
controlling shareholders having a linear relationship with stock return volatility (Li et al., 2011), corporate risk-taking (Boubakri et al.,
2013), and investment efficiency (Chen et al., 2017).
Considering the possibility of non-linear relationship between foreign controlling shareholder ownership and investment, in
Column (10), we estimate a piecewise linear OLS regression using the breakpoints of 10, 26, and 51 percent for foreign controlling
shareholder ownership. We examine whether foreign controlling shareholder ownership effects on investment vary with the size of the
controlling stake. We divide the ownership breakpoints in accordance with the various definitions of controlling shareholders in the
Companies Act (India) of 2013. Section 395 of the Companies Act, 1956 requires a minimum of 10 % equity shareholdings to qualify as
a minority shareholder for the purpose of expressing dissent against controlling shareholders. According to Section 114(2) of the
Companies Act of 2013, 75 % shareholder approval is required for any special resolution to pass, and we therefore choose an ownership
level of 26 % as one of the cut-off points. Further, 51 % indicates a majority shareholder, and we therefore choose an ownership level of
51 % as another breakpoint.
We observe a significant negative association between the capital expenditure ratio and foreign controlling shareholder ownership
at all levels, except for firms with foreign controlling shareholder ownership of less than 10 %. The magnitude of the association is
greatest and most significant for firms with foreign controlling shareholder ownership between 26 % and 51 %, that is, when foreign
controlling shareholders can influence corporate decision-making but are not majority shareholders. Thus, unlike Morck et al. (1988),
who show that firm value increases at low levels of insider ownership and decreases at high levels of insider ownership, the foreign
controlling shareholder ownership seems to yield a linear effect on the firm’s investment.
Overall, the empirical results suggest that firms with foreign controlling shareholders invest less than firms with no foreign con
trolling shareholders. Capital expenditures diminish further as ownership by foreign controlling shareholders increases. Our results
reaffirm the findings of Harford et al. (2008) and Richardson (2006), who conclude that greater shareholder governance levels in a
firm lower corporate investment.
5.2. Endogeneity tests
The literature raises the issue of ownership structure being endogenously determined (for example, see, Demsetz and Villalonga,
2001). Despite the inclusion of various control variables, our baseline model is still susceptible to the problem of omitting unobservable
variables that could impact the level of capital expenditure in a firm. Reverse causality can arise if foreign controlling shareholders
prefer, for example, to invest less in capital-intensive firms and more in service-oriented firms. To address endogeneity concerns, we
employ-two-stage least squares (2SLS) and difference-in-differences estimations.
5.2.1. Two stage least squares estimation

In our first identification strategy, we employ-two instrumental variables for FRGNPROM and conduct the regression using 2SLS. A
valid instrumental variable should be able to capture variations in the main explanatory variable, i.e., FRGNPROM (the relevance
condition) and be exogenous to changes in the level of capital expenditure (the exclusion condition).
Following Masulis et al. (2009), we use the level of foreign controlling shareholder ownership of a firm in the first year in which it
appears in our sample (denoted by IV1) as an instrumental variable. We argue that instruments that are related to a firm’s evolution of
foreign ownership and control would best explain if it is a FRGNCTRL or NONFRGN-firm in a given year (Li et al., 2011). Therefore, our
first instrument satisfies both the relevance and exclusion criteria to be a valid instrument. We argue that firms that attract a higher
capital investment by foreign shareholders are more likely to remain a foreign controlling shareholder firm. The second instrument
that we use is the industry average number of foreign controlling shareholders in a firm (denoted by IV2) (calculated by excluding the
firm itself). Prior literature (for example, Liu et al., 2014; Kabir et al., 2020) indicates that the industry average can function as an
exogenous instrument for firm-level endogenous variables. It could be expected that a firm is more likely to have foreign controlling
shareholders if other firms in its industry have a large number of foreign controlling shareholders. The results of the 2SLS regression are
reported in Table 5.
Column (1) presents the results of the first-stage regression, wherein we regress FRGNPROM on the two instrumental variables (IV1
and IV2) and the control variables used in our baseline regression. The coefficients on the two instrumental variables are statistically
significant at the 1 % level. Our F-statistic is highly significant, suggesting our instruments are not weak. Statistically insignificant
Sargan’s χ 2 and Bassman’s χ 2 values indicate that our model is not overidentified and our instruments are valid. In the second stage, we
use the fitted value of FRGNPROM obtained in the first-stage regression as the main explanatory variable. As reported in Column (2),
we continue to find that the coefficient on FRGNPROM is negative and statistically significant at the 1 % level.
Next we estimate 2SLS model to test whether the endogeneity of FRGNPROM_OWN is a concern. In the spirit of Boubaker et al.
(2017) and Paligorova and Xu (2012), we use IV3, which denotes the industry average foreign controlling shareholder ownership, as an
instrument for FRGNPROM_OWN and repeat the above analysis. The industry average foreign controlling shareholder ownership is
unlikely to influence investment level; however, it is expected to be correlated with the firm’s level of foreign controlling shareholder
ownership (FRGNPROM_OWN).
The first-stage results reported in Column (3) show that the coefficients on both the instrument variables are statistically significant
at the 1 % level. Our concern for weak instruments is mitigated as the reported F-statistic is 2032.17, statistically significant at the 1 %
level. Moreover, Sargan’s χ 2 and Bassman’s χ 2 values are not statistically significant, indicating that our model is not overidentified
and that our instruments are valid. The second-stage regression results presented in Column (4) show that the coefficient on
FRGNPROM_OWN is negative and statistically significant at the 1 % level.
12
Table 6
Difference-in-Differences Analysis.
This table presents results from difference-in-differences analysis. The main outcome variable is capital expenditure divided by total assets (CAPEX). FRGNPROM is
one if there are foreign controlling shareholders and zero otherwise, ANALYST indicates whether there is analyst following a firm, STKRET is the measure of stock
returns, STKVOL represents stock return volatility, LEV is calculated as total debt divided by total assets, DIVIDEND is the dividend paid divided by total assets, PE is
the price-to-earnings ratio, SGRTH is the annual sales growth rate, TURNOVER is the average trading volume of the firm’s stock divided by the number of
outstanding shares, and PROMOTERS is the percentage equity held by the controlling shareholders (promoters) of a firm. The sample period for this study is from
2001 (financial year beginning on April 1, 2000 and ending on March 31, 2001) to 2020 (financial year beginning on April 1, 2019 and ending on March 31, 2020).
Panel A: This panel presents results from tests of difference in means and medians for the control and treatment firms, for variables used for matching control and
treatment firms in the year firm adopted IndAS.
(1) (2) (3) (4) (5) = (1) – (3) (6) = (2) – (4)
Control Firms Treatment Difference in Difference in
Firms Means Medians
Mean Median Mean Median
CAPEX 4.520 2.974 5.155 2.994 − 0.635* − 0.020

FRGNPROM 3.813 0.000 4.233 0.000 − 0.419 0.000
ANALYST 2.307 0.000 3.061 0.000 − 0.754* 0.000
STKRET 0.477 0.250 0.429 0.224 0.048 0.026
STKVOL 0.540 0.518 0.556 0.558 − 0.016* − 0.039
LEV 0.320 0.302 0.322 0.314 − 0.002 − 0.012
DIVIDEND 0.009 0.004 0.011 0.006 − 0.002* − 0.002
PE − 2.253 1.651 − 1.825 1.194 − 0.428 0.458*
SGRTH 0.039 0.036 0.053 0.040 − 0.014 − 0.004
TURNOVER 6.639 2.520 6.921 2.703 − 0.282 − 0.183
PROMOTERS 0.570 0.578 0.579 0.595 − 0.009 − 0.017
Panel B: This panel reports the difference in means, before and after IndAS adoption, for foreign controlling shareholder ownership (FRGNPROM_OWN) and capital
expenditure (CAPEX), respectively. Row (R3) presents the difference in means between control and treatment firms.
(1) (2) (3) = (2) – (1) (4) (5) (6) = (4) – (5)
Foreign Controlling Capital
Shareholder Ownership Expenditure
Before IndAS Adoption After IndAS Difference in Before IndAS After IndAS Difference in
Adoption Means Adoption Adoption Means
R1 Control Firms 0.038 0.035 − 0.004 4.520 4.603 − 0.083

R2 Treatment Firms 0.042 0.043 0.001 5.155 4.022 1.132***
R3 Difference in Means − 0.004 − 0.008 − 0.635* 0.580
(R1 – R2)
Panel C: This panel presents OLS regression results. POST represents the post-IndAS adoption period, TREATMENT is one (zero) for treatment (control) firms,
FIRMSIZE is the natural logarithm of the beginning of the year book value of total assets, TOBINQ is the natural log of Tobin’s Q, CASHFLOW is operating cash
flow divided by total assets, LEV is calculated as total debt divided by total assets, and DIVIDEND is the dividend paid divided by total assets. The regression
model includes industry and year fixed effects (FE). t-statistics calculated using robust standard errors and clustered at the firm level are reported in parentheses.
***, **, and * indicate 1, 5, and 10 % significance levels, respectively.
POST × TREATMENT − 0.012

(-2.219)**
POST 0.001
(0.397)
TREATMENT 0.006
(1.419)
FIRMSIZE − 0.001
(-1.130)
TOBINQ 0.030
(6.342)***
CASHFLOW 0.146
(5.757)***
LEV 0.032
(3.302)***
DIVIDEND 0.402
(2.223)**
CONSTANT − 0.006
(-0.408)
INDUSTRY FE YES
N 980
Adj-R2 0.205
The results obtained from the 2SLS regression address our endogeneity concerns and confirm that foreign controlling shareholder
firms invest less than non-foreign controlling shareholder firms, and as equity held by foreign controlling shareholders increases,
capital expenditure reduces further.
13
Table 7
Domestic Controlling Shareholders, Institutional Investors, and Foreign Institutional Investors.
This table presents OLS regression results in which dependent variable is capital expenditure divided by total assets (CAPEX). FRGNPROM is one if there are foreign
controlling shareholders and zero otherwise, INDPROM_OWN and INST_OWN are the proportion of equity held by domestic controlling shareholders and
institutional investors, respectively, FII is one if a firm has shares owned by foreign institutional investors and zero otherwise, FIRMSIZE is the natural logarithm of
the beginning of the year book-value of total assets, TOBINQ is the natural log of Tobin’s Q, CASHFLOW is operating cash flow divided by total assets, LEV is
calculated as total debt divided by total assets, DIVIDEND is the dividend paid divided by total assets, and LAG_CAPEX is one year lagged CAPEX. All regressions
include industry and year fixed effects (FE). t-statistics calculated using robust standard errors and clustered at the firm level are reported in parentheses. ***, **,
and * indicate 1, 5, and 10 % significance levels, respectively. The sample period for this study is from 2001 (financial year beginning on April 1, 2000 and ending on
March 31, 2001) to 2020 (financial year beginning on April 1, 2019 and ending on March 31, 2020).
(1) (2) (3) (4) (5) (6)
Domestic Controlling Institutional Investors Foreign Institutional Investors

Shareholders
FRGNPROM − 0.004 − 0.019 − 0.007 − 0.006 − 0.008 − 0.007

(-2.244)** (-5.533)*** (-4.083)*** (-2.621)*** (-4.102)*** (-3.100)***
INDPROM_OWN 0.005 − 0.004
(1.211) (-0.974)
FRGNPROM × INDPROM_OWN 0.038
(4.829)***
INST_OWN − 0.021 − 0.019
(-2.671)*** (-2.209)**
FRGNPROM × INST_OWN − 0.013
(-0.936)
FII − 0.014 − 0.010
(-1.142) (-0.732)
FRGNPROM × FII − 0.016
(-0.698)
FIRMSIZE − 0.003 − 0.003 − 0.002 − 0.002 − 0.002 − 0.002
(-6.323)*** (-6.332)*** (-3.567)*** (-3.560)*** (-2.621)*** (-2.621)***
TOBINQ 0.034 0.034 0.035 0.035 0.036 0.036
(16.823)*** (17.118)*** (16.763)*** (16.758)*** (14.994)*** (14.987)***
CASHFLOW 0.118 0.118 0.123 0.123 0.127 0.127
(17.886)*** (17.935)*** (17.865)*** (17.878)*** (14.900)*** (14.905)***
LEV 0.039 0.039 0.038 0.038 0.047 0.047
(11.951)*** (11.898)*** (11.396)*** (11.377)*** (11.262)*** (11.258)***
DIVIDEND 0.221 0.220 0.177 0.179 0.054 0.055
(3.891)*** (3.891)*** (3.156)*** (3.187)*** (0.870) (0.894)
CONSTANT 0.034 0.039 0.030 0.030 0.021 0.021
(5.488)*** (6.061)*** (5.167)*** (5.075)*** (2.511)** (2.472)**
INDUSTRY FE YES YES YES YES YES YES
YEAR FE YES YES YES YES YES YES
N 27,672 27,672 25,262 25,262 16,032 16,032
Adj-R2 0.151 0.153 0.157 0.157 0.186 0.186
5.2.2. Difference-in-Differences analysis

Our second identification strategy involves performing a difference-in-differences analysis and using propensity score matching to
reduce selection bias and further address endogeneity concerns. We exploit the introduction of new accounting standards (IndAS) in
2015 as an exogenous event. These new accounting standards became effective for different companies in phases, based on their listing
status and net worth (Ministry of Corporate Affairs, 2015). IndAS, which are converged with International Financial Reporting
Standards, were adopted with the goal of improving the quality of the financial reporting of Indian firms and making Indian capital
markets more accessible to foreign investors. Therefore, we expect the introduction of IndAS to affect ownership by foreign controlling
shareholders in Indian firms, which would subsequently cause reduction in capital expenditures.
DeFond et al. (2011) show that foreign ownership increased due to the improved accounting quality and comparability that fol
lowed the mandatory adoption of IFRS. Similarly, Gordon et al. (2012), using data from 124 countries, provide evidence that the
mandatory adoption of IFRS increased foreign direct investment, and more so in developing economies than in developed ones.
Similarly, IndAS plausibly generates exogenous variation in the proportion of foreign promotion ownership and is unlikely to affect
corporate investment directly. However, IndAS adoption did not affect all firms equally. Daske et al. (2013) show that not all com
panies adopted new accounting standards to improve accounting quality. Some firms made superficial changes to their accounting
policies. Such firms did not observe any improvement in capital market outcomes from “adopting” better-quality accounting
standards.
We expect to observe improvements in the accounting quality of firms that made substantial changes to their accounting policy
after the adoption of IndAS. Such firms will be able to attract foreign investors. We define treatment firms as those that likely use IndAS
adoption as an effective tool to communicate with their foreign owners (or promoters) and “seriously” adopt the new standards. The
control group is unlikely to have made substantial changes to their accounting practices (and are, therefore “label” adopters) and were
unaffected by the adoption of new accounting standards. IndAS adoption provides a unique setting for a quasi-experiment to inves
tigate changes in capital expenditure across treatment and control firms.
14
We measure changes in firms’ accounting policies as the change in the absolute amount of accruals observed in the IndAS adoption
year. We define treatment (control) firms as those that made more (less) than the industry median amount of changes to their ac
counting policy in the IndAS adoption year. The dummy variable TREATMENT takes the value of one (zero) for treatment (control)
firms. We employ propensity score matching to match each treatment firm with a control firm. Prior studies (for example, Ball et al.,
2003; Leuz, 2003; Ball and Shivakumar, 2005; Burgstahler et al., 2006; Daske et al., 2013) suggest that firms that have more financing
needs are more profitable, have larger growth opportunities, and have more dispersed ownership structures have greater incentives to
provide high-quality business information through their financial reporting.
We estimate a logit model with TREATMENT as the dependent variable and explanatory variables include whether analysts are
following a firm (ANALYST), stock returns (STKRET), stock return volatility (STKVOL), financial leverage (LEV), the ratio of dividends
paid to total assets (DIVIDEND), the price-to-earnings ratio (PE), sales growth (SGRTH), stock turnover (TURNOVER), and the per
centage of closely held shares (PROMOTERS).5 The logit regression determines the likelihood that a firm makes substantial changes to
its accounting policy in accordance with IndAS. Next, we match each treatment firm to a control firm using the propensity score
(within a caliper of 10 %), without replacement. We keep only those treatment and control pairs, which have observations for both
year before and year after IndAS adoption. We finally get 620 pairs of treatment and control firms. We compare the CAPEX values in
the post-IndAS adoption period (one year after) and the pre-IndAS adoption (one year before) period for the control and treatment
firms. The results of the difference-in-differences analysis are reported in Table 6.
Panel A of Table 6 reports descriptive statistics for the variables used to match treatment and control firms. There are no significant
differences between the treatment and control firms, confirming that the matching procedure successfully generates a matched sample
of treatment and control firms. In a univariate analysis in Panel B, we note that the increase in foreign controlling shareholder
ownership is greater for treatment firms compared to control firms. This evidence is consistent with our conjecture that firms that made
substantial changes to their accounting policies observe increases in foreign controlling shareholder ownership. Thus only treatment
firms that make substantial changes to their accounting policies, observe an increase in the foreign promoter ownership and a sig
nificant decrease in capital expenditure after IndAS adoption.
To more formally examine if CAPEX decreases more for treatment firms than control firms in the post-IndAS adoption period, we
augment regression model (1) by replacing FRGNPROM with TREATMENT, POST, and TREATMENT × POST. Not all companies
adopted IndAS in the same year. Due to the staggered IndAS adoption, we define POST as equal to one for the year after the firm adopts
IndAS and zero for the year before the firm adopts IndAS. The coefficient on the interaction term captures the change in CAPEX for
treatment firms with respect to the change in CAPEX observed for control firms around IndAS adoption.
Consistent with our prediction, in Panel C of Table 6, we observe a negative coefficient (statistically significant at the 5 % level) on
the interaction term. This result implies a significant decrease in the capital expenditure of those firms that observe increases in foreign
controlling shareholder ownership. This evidence further strengthens our interpretation of foreign controlling shareholders causing a
decrease in corporate investment.
5.3. Domestic controlling Shareholders, institutional Investors, and foreign institutional investors
Next, we test our hypotheses H2-H4, whether domestic controlling shareholders, institutional investors, and foreign institutional
investors affect corporate investment and whether they influence how foreign controlling shareholders affect corporate investment.
We define INDPROM_OWN and INST_OWN as the equity ownership of domestic promoters (or controlling shareholders) and
institutional investors, respectively. The variable FII takes the value of one if there are foreign institutional investors and zero
otherwise. To test hypotheses H2a, H3a, and H4a, we estimate our regression model (1) by including one of these variables:
INDPROM_OWN, INST_OWN, and FII. To test hypotheses H2b, H3b, and H4b, we reestimate the regression model by interacting these
variables with FRGNPROM. We report these results in Table 7.6
In Column (1) of Table 7, the coefficient on FRGNPROM is negative and statistically significant at the 5 % level, whereas the
coefficient on INDPROM_OWN is not statistically significant. In Column (2), we introduce an interaction term between FRGNPROM and
INDPROM_OWN. We observe that the coefficient on FRGNPROM is negative and statistically significant whereas the coefficient on the
interaction term FRGNPROM × INDPROM_OWN is positive and statistically significant at the 1 % level. These results show that the
negative effect of foreign controlling shareholders on capital expenditure is robust to controlling for ownership by domestic controlling
shareholders. Secondly, these results show that FRGNCTRL-firms invest more as ownership by domestic controlling shareholders
increases. Thus, we find evidence in support of Hypothesis 2b but fail to reject Hypothesis 2a.
In both Columns (3) and (4), the coefficients on FRGNPROM are negative and statistically significant. We observe negative and
statistically significant (at the 1 % level) coefficients on INST_OWN, indicating that firms invest less as institutional investor ownership
increases. The insignificant coefficient on the interaction term in Column (4) does not indicate any incremental effect of INST_OWN on
capital investments in FRGNCTRL-firms. Thus, the evidence is in favor of hypothesis (H3a) that capital expenditure decreases with
institutional investor ownership. However, institutional investor ownership does not significantly affect investments in firms with
5
The Appendix gives detailed definitions of the variables.
6
As a robustness check, we control for INDPROM_OWN, INST_OWN, and FII, as well as board characteristics in our regression model. The results,
reported in Columns (1)-(3) of Table A2 (in Appendix), are consistent with our main finding that the presence of foreign controlling shareholders is
associated with the reduction in capital expenditure. These results confirm that our results are robust to controlling for corporate governance
mechanisms.
15
foreign controlling shareholders (Hypothesis 3b).

The last two columns of Table 7 show insignificant coefficients on FII and the interaction term, but the coefficients on FRGNPROM
retain negative sign and statistical significance. These results suggest that foreign institutional investors do not significantly impact
capital expenditures nor do they influence the relationship between foreign controlling shareholders and corporate investment. Thus,
these results support our Hypotheses 4a and 4b.
In sum, the results suggest that in foreign controlling shareholder firms, capital expenditures increase with domestic controlling
shareholder ownership and are not influenced by the institutional investor ownership or the presence of foreign institutional investors.
We also note that capital expenditure reduces as institutional investor ownership increases.
5.4. Firm characteristics
In this section, we reestimate how the effects of foreign controlling shareholder ownership on capital expenditure vary with firm
characteristics. These firm characteristics influence the information environment surrounding a firm and the degree to which a firm is
prone to agency conflicts, thus affecting the firm’s investment behavior. Stein (2003) provides a comprehensive survey of the corporate
investment literature and posits the influence of information asymmetry and agency conflicts over how a firm’s investment outcomes
are shaped.
We split our sample based on firm size, stock illiquidity, accrual quality, cash holdings, the level of competition in the firm’s in
dustry, how financially constrained a firm is, and firm age.7 For each year, we divide firms into below and above industry-median of
firm-specific variables including MKTCAP which is the market capitalization of a firm, ILLIQ which measures the stock illiquidity and is
measured as the annual average of the ratio of daily absolute stock returns and the trading volume (Amihud, 2002), AQ which denotes
accrual quality, calculated as the standard deviation of residuals from regressions relating current accruals to one-year lagged, current,
and one-year ahead cash flows (Dechow and Dichev, 2002; Biddle et al., 2009),8 and FIRMAGE is the firm age counted in two ways: (1)
from the year of incorporation and (2) from the year when it first gets listed on a stock exchange. Other variables, which we consider
are cash to total assets ratio (CASH), industry competitiveness (CMPTN), measured as the sum of the square of the market shares of all
the firms in the industry to which a firm belongs, and measures of financial constraints calculated following the Kaplan and Zingales
(1997), and Hadlock and Pierce (2010) methodology. We estimate regression model (1) separately for the two subsamples thus ob
tained and examine how the FRGNPROM–CAPEX relation varies across the two subsamples. These results are presented in Table 8. We
include all control variables as in the main regression but only report coefficients on FRGNPROM for brevity.9
We observe that the negative effect of foreign controlling shareholders on capital expenditure is more pronounced among large
firms, firms with more liquid stocks, firms with good accrual quality, young firms, firms with greater cash holdings, firms operating in a
less competitive environment, and financially unconstrained firms (based on Kaplan and Zingales (1997), and Hadlock and Pierce
(2010)). These results indicate that the negative effect of foreign controlling shareholders on capital expenditure is stronger among
firms with good information quality, firms more prone to agency problems, and financially unconstrained firms.
Overall, the results demonstrate that the capital expenditure levels in foreign controlling shareholder firms are reduced not because
they bypass investment opportunities due to difficulties in raising external finance but rather because of the better monitoring by
foreign controlling shareholders in disciplining managers.
5.5. Investment efficiency
So far, the empirical results show that FRGNCTRL-firms invest less than NONFRGN-firms. However, a more pervasive question is
whether the investments made by foreign controlling shareholder firms are efficient (Hypothesis H5a). To test whether greater equity
ownership of foreign controlling shareholders is associated with efficient investments, we follow the approach developed by Biddle
et al. (2009). Specifically, we first estimate, for each industry and each year, the expected level of capital expenditure as a function of
growth opportunities, as shown in the following model (2). The residuals obtained from this regression represent deviations from
expected investment for a firm.
CAPEX i, t+1 = β0 + β1 GROWTH OPPi,t + εi, t+1 (2)
We classify firms as underinvesting (overinvesting) if they belong to the bottom (top) quartile of residuals. The firms in the middle
two quartiles act as the benchmark group. We estimate a multinomial logistic regression to test the likelihood of a firm being in the two
extreme quartiles as a function of foreign controlling shareholder ownership. In regression model (2), we use annual sales growth rate
and Tobin’s Q as proxies of growth opportunities. Table 9 reports the empirical results.
In Column (1) of Table 9, the negative coefficient (statistically significant at the 1 % level) on FRGNPROM_OWN suggests that the
7
We estimate stock illiquidity following Amihud (2002), accrual quality based on the works of Dechow and Dichev (2002) and Biddle et al.
(2009), the level of industry competitiveness using the Herfindahl–Hirschman index, and how financially constrained a firm is using the indices of
Kaplan and Zingales (1997) and Hadlock and Pierce (2010).
8
Lower (higher) values of this measure indicate better (poor) financial reporting quality.
9
As a robustness check, we control for these additional firm-specific variables in our regression model. The results are consistent with our main
finding that the presence of foreign controlling shareholders is associated with a reduction in capital expenditure. These results are reported in
Column (4) of Table A2 (in Appendix).
16
Table 8
Firm Characteristics.
controlling shareholders and zero otherwise. The full sample is divided into two subsamples based on different firm characteristics and the regression is estimated
separately for the two subsamples. These firm characteristics include MKTCAP which is the market capitalization of a firm, ILLIQ which measures the stock
illiquidity and is measured as the annual average of the ratio of daily absolute stock returns to the trading volume (Amihud, 2002), AQ which denotes accrual
quality, calculated as the standard deviation of residuals from regressions relating current accruals to one-year lagged, current, and one-year ahead cash flows (
Dechow and Dichev, 2002; Biddle et al., 2009), FIRMAGE (LISTAGE) is the difference between the year of firm’s incorporation (year when it first gets listed on a
stock exchange) and the given year, CASH is the cash to total assets ratio (CASH), industry competitiveness (CMPTN), which is measured as the sum of the square of
the market shares of all the firms in the industry to which a firm belongs, and KZ (HP) is the measure of financial constraints, which is calculated following the
Kaplan and Zingales (1997) (Hadlock and Pierce, 2010) methodology. All control variables are same as in the baseline regression model and are not shown here for
brevity. All regressions include industry and year fixed effects. t-statistics calculated using robust standard errors and clustered at the firm level are reported in
parentheses. ***, **, and * indicate 1, 5, and 10 % significance levels, respectively. The sample period for this study is from 2001 (financial year beginning on April
1, 2000 and ending on March 31, 2001) to 2020 (financial year beginning on April 1, 2019 and ending on March 31, 2020).
(1) (2)
Panel A: This panel reports regression results for the two subsamples obtained by dividing the full sample based on below and above industry-median market
capitalization (MKTCAP).
Small Firms Large Firms
FRGNPROM − 0.005 − 0.006

(-2.224)** (-2.938)***
N 14,163 14,012
Adj-R2 0.126 0.188
Panel B: This panel reports regression results for the two subsamples obtained by dividing the full sample based on below and above industry-median stock
illiquidity (ILLIQ), which is calculated by following Amihud (2002).
High Stock illiquidity Low Stock illiquidity
FRGNPROM − 0.006 − 0.005

(-2.990)*** (-1.994)**
N 14,159 14,010
Adj-R2 0.188 0.122
Panel C: This panel reports regression results for the two subsamples obtained by dividing the full sample based on below and above industry-median accrual quality
(AQ), calculated by following Dechow and Dichev (2002).
Good Accrual quality Poor Accrual quality

(Less accrual volatility) (High accrual volatility)
FRGNPROM − 0.006 − 0.005

(-2.838)*** (-2.127)**
N 13,209 13,073
Adj-R2 0.180 0.135
Panel D: This panel reports regression results for the two subsamples obtained by dividing the full sample based on below and above industry-median firm
incorporation age (FIRMAGE).
Young (incorporation age) Old (incorporation age)
FRGNPROM − 0.010 − 0.003

(-3.720)*** (-1.231)
N 14,735 13,440
Adj-R2 0.152 0.157
Panel E: This panel reports regression results for the two subsamples obtained by dividing the full sample based on below and above industry-median firm listing age
(LISTAGE).
Young (listing age) Old (listing age)
FRGNPROM − 0.009 − 0.003

(-3.635)*** (-1.286)
N 15,452 12,517
Adj-R2 0.148 0.159
Panel F: This panel reports regression results for the two subsamples obtained by dividing the full sample based on below and above industry-median cash holdings
(CASH).
Firms with less cash holdings Firms with more cash holdings
FRGNPROM − 0.004 − 0.007

(-1.831)* (-2.784)***
N 13,083 12,924
2
Adj-R 0.169 0.144
Panel G: This panel reports regression results for the two subsamples obtained by dividing the full sample based on below and above industry competitiveness
(CMPTN).
Low Competition High Competition
FRGNPROM − 0.007 − 0.005

(-3.216)*** (-2.169)**
N 14,449 13,726
Adj-R2 0.134 0.170
17
Panel H: This panel reports regression results for the two subsamples obtained by dividing the full sample based on below and above industry-median measure of
financial constraint (KZ), calculated by following Kaplan and Zingales (1997).
Financially unconstrained Financially constrained
FRGNPROM − 0.005 − 0.001

(-1.979)** (-0.525)
N 7,483 7,472
Adj-R2 0.173 0.190
Panel I: This panel reports regression results for the two subsamples obtained by dividing the full sample based on below and above industry-median measure of
financial constraint (HP), calculated by following Hadlock and Pierce (2010).
Financially unconstrained Financially constrained

FRGNPROM − 0.007 − 0.004
(-3.395)*** (-1.920)*
N 13,952 13,943
Adj-R2 0.179 0.127
Table 9
Investment Efficiency.
This table presents results of the multinomial logit regression in which dependent variable is the residuals obtained by regressing capital expenditure to total assets
ratio (CAPEX) on growth opportunities (sales growth and Tobin’s Q). Firms belonging to top (bottom) most quartile of residuals are classified as overinvesting
(underinvesting), and the middle two quartiles act as the benchmark firms. Columns (1), (3), (5), and (7) predict the likelihood that a firm will underinvest. Columns
(2), (4), (6), and (8) predict the likelihood that a firm will overinvest. In Columns (1), (2), (5), and (6) sales growth is used as the proxy for growth opportunities. In
Columns (3), (4), (7), and (8) Tobin’s Q is used as the proxy for growth opportunities. FRGNPROM is one if there are foreign controlling shareholders and zero
otherwise, FRGNPROM_OWN is the proportion of shares owned by foreign controlling shareholders, INDPROM_OWN is the proportion of shares owned by domestic
controlling shareholders, FIRMSIZE is the natural logarithm of the beginning of the year book value of total assets, TOBINQ is the natural log of Tobin’s Q,
CASHFLOW is operating cash flow divided by total assets, LEV is calculated as total debt divided by total assets, DIVIDEND is the dividend paid divided by total
assets, and LAG_CAPEX is one year lagged CAPEX. All regressions include industry and year fixed effects (FE). t-statistics calculated using robust standard errors and
clustered at the firm level are reported in parentheses. ***, **, and * indicate 1, 5, and 10 % significance levels, respectively. The sample period for this study is from
2001 (financial year beginning on April 1, 2000 and ending on March 31, 2001) to 2020 (financial year beginning on April 1, 2019 and ending on March 31, 2020).
(1) (2) (3) (4) (5) (6) (7) (8)

Foreign Controlling Shareholders Domestic Controlling Shareholders
Sales Growth Tobin’s Q Sales Growth Tobin’s Q
Under-INV Over-INV Under-INV Over-INV Under-INV Over-INV Under-INV Over-INV
FRGNPROM_OWN − 0.989 − 0.415 − 0.838 − 0.045

(-3.653)*** (-1.647)* (-3.336)*** (-0.204)
FRGNPROM 0.118 0.185 0.032 0.086
(1.383) (2.378)** (0.408) (1.129)
INDPROM_OWN 0.140 − 0.084 0.222 − 0.263
(1.105) (-0.551) (1.953)* (-1.948)*
FIRMSIZE − 0.038 − 0.011 − 0.063 − 0.019 − 0.033 − 0.005 − 0.061 − 0.018
(-2.343)** (-0.582) (-4.204)*** (-1.180) (-2.038)** (-0.268) (-4.031)*** (-1.091)
TOBINQ 0.924 − 0.560 0.811 0.683 0.895 − 0.572 0.783 0.684
(13.167)*** (-6.060)*** (13.170)*** (9.894)*** (12.823)*** (-6.064)*** (12.761)*** (9.763)***
CASHFLOW 3.951 − 2.198 3.718 − 2.408 3.990 − 2.159 3.748 − 2.376
(17.123)*** (-9.932)*** (18.130)*** (-12.570)*** (17.187)*** (-9.694)*** (18.116)*** (-12.255)***
LEV 2.385 0.026 2.115 0.054 2.389 − 0.000 2.133 0.063
(20.423)*** (0.186) (20.836)*** (0.422) (20.331)*** (-0.001) (20.859)*** (0.481)
DIVIDEND 4.373 − 24.490 3.492 − 15.361 4.821 − 25.443 3.820 − 16.501
(2.562)** (-6.367)*** (2.296)** (-6.422)*** (2.785)*** (-6.835)*** (2.477)** (-6.893)***
Constant − 2.090 − 0.460 − 1.681 − 0.376 − 2.220 − 0.410 − 1.854 − 0.290
(-9.433)*** (-2.146)** (-7.043)*** (-2.132)** (-9.599)*** (-1.835)* (-7.548)*** (-1.552)
INDUSTRY FE YES YES YES YES YES YES YES YES
YEAR FE YES YES YES YES YES YES YES YES
N 23,331 23,331 27,802 27,802 22,959 22,959 27,302 27,302
likelihood that a firm will underinvest decreases with foreign controlling shareholder ownership. Similar results are obtained if we
proxy for growth opportunities with Tobin’s Q, as shown in Column (3). The coefficient on FRGNPROM_OWN is negative but only
statistically significant at the 10 % level in Column (2) and insignificant in Column (4).
Next, we test Hypothesis 5b, that investment efficiency decreases as ownership by domestic controlling shareholders increases.
These results are reported in Columns (5)-(8). We observe that the likelihood that a firm will underinvest increases and that a firm will
overinvest decreases with ownership by domestic controlling shareholders. These results are significant only at the 10 % level and only
when Tobin’s Q is used as a proxy for measuring growth opportunities.
Based on the results discussed in this subsection, combined with our main findings, we conclude that FRGNCTRL-firms invest less
but invest efficiently. These firms avoid underinvestment and do not overinvest. The improved investment efficiency can be attributed
18
Table 10
Project Characteristics.
This table compares project characteristics undertaken by FRGNCTRL-firms and NONFRGN-firms. The FRGNCTRL (NONFRGN) firms are those which have at least
one (none) foreign controlling shareholder. COMPLETION (IMPLEMENTATION) refers to the number of years taken to complete (start) the project since the project
was announced, NEWUNIT is one (zero) if the project involves establishment of a new unit (substantial expansion of the existing plant), STALL_ABANDON represents
the projects that have been stalled or abandoned, and COST is the natural logarithm of the total cost of all the investments announced by the firm. ***, **, and *
indicate 1, 5, and 10 % significance levels, respectively. The sample period for this study is from 2001 (financial year beginning on April 1, 2000 and ending on
Panel A: This panel compares the descriptive statistics for projects undertaken by FRGNCTRL-firms and NONFRGN-firms. The last two columns exhibit the results of
the test of differences in means and medians for the two groups.
(1) (2) (3) (4) (5) = (1) - (3) (6) = (2) - (4)
Foreign Controlling Non-Foreign Controlling

Shareholder Firms Shareholder Firms
Mean Median Mean Median Difference in Difference in

Means Medians
COMPLETION 2.766 2.100 2.559 1.890 0.206*** 0.210***

IMPLEMENTATION 0.874 0.490 0.782 0.367 0.092*** 0.123***
NEWUNIT 0.712 1.000 0.756 1.000 − 0.044*** 0.000***
STALL_ABANDON 0.339 0.000 0.314 0.000 0.026** 0.000*
COST 7.059 6.957 6.755 6.685 0.304*** 0.272***
Panel B: This panel presents OLS/logit regression results in which dependent variable (Y) is one of the project characteristics (COMPLETION, IMPLEMENTATION,
NEWUNIT, STALL_ABANDON, or COST). FRGNPROM is one for foreign controlling shareholder firms and zero otherwise, FIRMSIZE is the natural logarithm of
the beginning of the year book value of total assets, TOBINQ is the natural log of Tobin’s Q, CASHFLOW is operating cash flow divided by total assets, LEV is
calculated as total debt divided by total assets, and DIVIDEND is the dividend paid divided by total assets. All regressions include industry and year fixed effects
(FE). t-statistics calculated using robust standard errors and clustered at the firm level are reported in parentheses.
(1) (2) (3) (4) (5)

Y = COMPLETION Y= Y = NEWUNIT Y= Y = COST
IMPLEMENTATION STALL_ABANDON
OLS OLS Logit Logit OLS
FRGNPROM 0.115 0.016 − 0.175 0.073 0.169

(1.213) (0.363) (-1.960)** (0.805) (2.340)**
FIRMSIZE 0.196 0.088 0.041 0.168 0.462
(7.027)*** (6.090)*** (1.606) (7.215)*** (24.394)***
TOBINQ − 0.070 − 0.021 0.258 − 0.224 − 0.114
(-0.622) (-0.349) (2.606)*** (-1.947)* (-1.221)
CASHFLOW − 0.665 0.013 − 0.882 − 1.174 0.626
(-2.044)** (0.074) (-2.408)** (-3.420)*** (2.213)**
LEV − 0.380 − 0.182 − 0.106 − 0.256 0.525
(-2.034)** (-2.189)** (-0.677) (-1.493) (3.791)***
DIVIDEND − 4.613 − 2.289 1.210 − 6.806 − 3.094
(-1.924)* (-1.669)* (0.463) (-2.680)*** (-1.388)
CONSTANT 1.155 0.105 2.274 − 1.415 1.595
(2.502)** (0.483) (5.553)*** (-3.856)*** (4.889)***
INDUSTRY FE Yes Yes Yes Yes Yes
YEAR FE Yes Yes Yes Yes Yes
N 4,980 5,945 8,257 8,266 5,148
Adj-R2 0.220 0.071 - - 0.297
to both the monitoring and informational capabilities of the foreign controlling shareholders (Li et al., 2011). Our results support the
idea that foreign controlling shareholders can be important corporate governance agents.
5.6. Project characteristics
We now examine the differences in the nature and timing of projects announced by FRGNCTRL and NONFRGN-firms. The data are
sourced from the Capex dx database maintained by the CMIE. This dataset provides project-level information for firms with respect to
the location, cost, date of announcement, date of completion, industry, and identity of the owners or promoters for each investment
project. The data pertaining to the status of the project with respect to its implementation, completion, whether it was stalled or
abandoned, and so forth are also included in the database. This rich and comprehensive project-level data allow us to disaggregate a
firm’s capital expenditures and examine how investment projects undertaken by firms with foreign controlling shareholder differ from
those undertaken by firms with no foreign controlling shareholder.
We define the variables pertaining to key project characteristics. These include COMPLETION, the number of years taken to
complete the project since its announcement; IMPLEMENTATION, the number of years taken to commence the project since its
announcement; NEWUNIT, which takes the value of one for projects that involve establishing a new unit, and zero for expanding an
existing investment project; STALL_ABANDON, which takes the value one for projects categorized as stalled or abandoned, and zero
otherwise; and COST, the natural logarithm of the total cost of all projects announced by the firm in a year. We report our findings in
19
Table 11
Other Investments.
This table presents OLS regression results in which dependent variable (Y) is research and development spending or acquisition, divided by total assets. FRGNPROM
is one if there are foreign controlling shareholders and zero otherwise, FRGNPROM_OWN is the proportion of shares owned by foreign controlling shareholders,
FIRMSIZE is the natural logarithm of the beginning of the year book value of total assets, TOBINQ is the natural log of Tobin’s Q, CASHFLOW is operating cash flow
divided by total assets, LEV is calculated as total debt divided by total assets, DIVIDEND is the dividend paid divided by total assets, and LAG_CAPEX is one year
lagged CAPEX. All regressions include industry and year fixed effects (FE). t-statistics calculated using robust standard errors and clustered at the firm level are
reported in parentheses. ***, **, and * indicate 1, 5, and 10 % significance levels, respectively. The sample period for this study is from 2001 (financial year
beginning on April 1, 2000 and ending on March 31, 2001) to 2020 (financial year beginning on April 1, 2019 and ending on March 31, 2020).
(1) (2) (3) (4) (5) (6)
Y = Research and Development Spending Y = Amount Spent on Acquisition
FRGNPROM 0.064 0.113 0.000 0.000

(2.372)** (3.057)*** (1.442) (0.464)
FRGNPROM_OWN − 0.216 − 0.224 0.001 0.000
(-2.234)** (-2.183)** (0.632) (0.347)
FIRMSIZE 0.021 0.020 0.012 0.000 0.000 0.000
(3.160)*** (3.154)*** (0.681) (3.048)*** (3.052)*** (2.093)**
TOBINQ 0.268 0.273 0.359 0.001 0.001 0.002
(8.156)*** (8.201)*** (4.712)*** (2.256)** (2.174)** (1.838)*
CASHFLOW 0.069 0.064 0.251 − 0.001 − 0.001 − 0.001
(1.402) (1.308) (1.935)* (-1.729)* (-1.719)* (-0.282)
LEV − 0.174 − 0.179 − 0.201 0.000 0.000 0.001
(-5.450)*** (-5.618)*** (-2.618)*** (0.386) (0.448) (0.872)
DIVIDEND 1.573 1.552 − 0.673 0.011 0.011 0.029
(2.286)** (2.251)** (-0.509) (1.004) (1.008) (0.917)
CONSTANT − 0.168 − 0.160 − 0.084 − 0.000 − 0.000 − 0.001
(-3.264)*** (-3.115)*** (-0.631) (-0.554) (-0.586) (-0.343)
INDUSTRY FE YES YES YES YES YES YES
YEAR FE YES YES YES YES YES YES
N 23,176 23,176 4,551 22,959 22,959 4,475
Adj-R2 0.099 0.101 0.124 0.004 0.004 0.012
Table 10.
The univariate analysis presented in Table 10 Panel A shows that, compared to NONFRGN-firms, projects undertaken by
FRGNCTRL-firms tend to take longer to complete and implement, and are larger. Additionally, 76 % (71 %) of the projects announced
by FRGNCTRL-firms (NONFRGN-firms) tend to be new units, instead of expansions.
To test this formally, we reestimate regression model (1) using COMPLETION, IMPLEMENTATION, NEWUNIT, STALL_ABANDON,
and COST as the dependent variable. For this analysis, the unit of observation is the project–year, and the results are reported in Panel B
of Table 10. After controlling for firm characteristics, industry, and year fixed effects, we do not observe any significant differences
between FRGNCTRL-firms and NONFRGN-firms in terms of the time taken to complete and commence projects and the likelihood of
projects being stalled or abandoned, as shown in Columns (1), (2), and (4), respectively. However, compared to NONFRGN-firms,
FRGNCTRL-firms are less likely to invest in new units, as shown in Column (3). Moreover, in Column (5), the positive and statistically
significant coefficient on FRGNPROM suggests that FRGNCTRL-firms invest in larger projects than NONFRGN-firms.
5.7. Other investments
In this section we examine whether foreign controlling shareholders also have significant influence on amount spent on R&D and
acquisitions. For this purpose, we reestimate our baseline regression model (1) using the amounts spent on R&D (RND) and acqui
sitions (ACQ), both scaled by total assets, as our dependent variables. Table 11 presents these results. Columns (3) and (6) present
results for the subsample of firms with foreign controlling shareholders. All other columns report results for the full sample.
Column (1) shows that, on average, FRGNCTRL-firms spend more on R&D, compared to NONFRGN-firms. The results reported in
Columns (2) and (3) indicate that R&D spending decreases as foreign controlling shareholder ownership increases. We do not observe
any significant effect of foreign controlling shareholders on acquisitions, as shown in Columns (4) to (6).
6. Conclusion
In this paper, we investigate whether the presence of foreign controlling shareholders effects the level of corporate investments. We
also examine how capital expenditures change with foreign controlling shareholder ownership. We base our study on the data obtained
for a sample of 3,129 unique non-financial publicly listed Indian firms for the period from 2001 to 2020. We provide evidence that the
presence of foreign controlling shareholders, on average, is related to lower capital expenditure levels, and capital expenditure de
creases as foreign controlling shareholder ownership increases. Further, the results obtained from endogeneity tests confirm that the
negative effect of foreign controlling shareholders on capital investment is causal in nature.
In addition, we find that the negative effect of foreign controlling shareholders on investment is more pervasive among firms with a
20
good information environment, firms prone to agency problems, and firms that are less financially constrained. We also note that the
negative effect of foreign controlling shareholders on investment is more pronounced among younger firms. We also document that
investment efficiency increases (reductions in both underinvestment and overinvestment) with foreign controlling shareholder
ownership. These results imply that lower investment does not necessarily mean that the foreign controlling shareholders are investing
less than the optimal level. Furthermore, using project-level data, we provide evidence that foreign controlling shareholder firms are
associated with larger investment projects and the expansion of existing units (rather than setting up new plants).
Overall, our findings are particularly important for developing economies, where shareholder rights are generally weak, and the
legal and institutional framework is not very effective. Potentially, foreign controlling shareholders are able to exert a positive in
fluence on corporate decisions because of their expertise and knowledge. Our study provides valuable insights for investors, market
regulators, and policymakers in emerging economies with respect to policy decisions concerning improvements in corporate gover
nance mechanisms to protect minority shareholders. It lends support to the conjecture that foreign investors play an important role in
improving corporate governance practices in emerging capital markets such as India.
CRediT authorship contribution statement
Anushka Agarwal: Conceptualization, Methodology, Validation, Formal analysis, Writing – original draft, Funding acquisition.
Neeru Chaudhry: Conceptualization, Methodology, Software, Validation, Data curation, Writing – review & editing, Visualization.
Declaration of Competing Interest
The authors declare that they have no known competing financial interests or personal relationships that could have appeared to
influence the work reported in this paper.
Acknowledgment
Anushka Agarwal is grateful to receive financial support from the University Grants Commission, India.
Appendix A1. Variable definitions
Variable Name Definition
CAPEX Capital expenditure divided by total assets

RND Research and development expenditure divided by total assets
ACQ Amount spent on acquisitions divided by total assets
FIRMSIZE The natural logarithm of the beginning of the year book value of total assets
TOBINQ The natural logarithm function of TOBINQ, which is calculated as the ratio of market value of total assets to book value of total assets
CASHFLOW The ratio of operating cash flow to total assets
LEV The long-term debt divided by total assets
DIVIDEND The dividend divided by total assets
FRGNPROM Indicator variable which is one if firm has shares owned by foreign controlling shareholders and zero otherwise
FRGNPROM_OWN Proportion of outstanding equity shares held by foreign controlling shareholders
INDPROM_OWN Proportion of outstanding equity shares held by domestic controlling shareholders
INST_OWN Proportion of outstanding equity shares held by institutional investors
FII Indicator variable which is one if a firm has shares owned by foreign institutional investors and zero otherwise
IV1 Proportion of outstanding equity shares held by foreign controlling shareholders in the first year the firm appears in the sample
IV2 Industry average number of foreign controlling shareholders calculated by excluding the firm itself
IV3 Industry average foreign controlling shareholder ownership calculated by excluding the firm itself
ANALYST Indicator variable that is equal to one if there is at least one analyst following a firm and zero otherwise
STKRET Annual stock returns
STKVOL Annual stock return volatility
PE Profit after tax divided by net income
SGRTH Annual sales growth
TURNOVER Average stock trading volume
PROMOTERS Proportion of shares held by promoters
TREATMENT Indicator variable that takes value of one if a firm makes substantial changes to its accounting policy following IndAS adoption and zero
otherwise
POST Indicator variable that takes value of one (zero) for one year after (before) a firm adopts IndAS
MKTCAP Market capitalization of the firm
ILLIQ Annual average of the ratio of daily absolute stock returns to the trading calculated by following Amihud (2002)
AQ Standard deviation of residuals from regressions relating current accruals to one-year lagged, current, and one-year ahead cash flows,
calculated by following Dechow and Dichev (2002)
FIRMAGE Difference between the year in which the firm was incorporated and any particular year
LISTAGE Difference between the year in which the firm was first listed on the stock exchange and any particular year
CASH Amount of cash holdings divided by total assets
CMPTN Sum of the square of the market shares of all the firms in the industry to which a firm belongs
(continued on next page)
21
(continued )
Variable Name Definition
KZ The degree of financial constraints calculated by following Kaplan and Zingales (1997)
HP The degree of financial constraints calculated by following Hadlock and Pierce (2010)
COMPLETION The number of years taken to complete the project since announcement
IMPLEMENTATION The number of years taken to start the implementation of the project since announcement
NEWUNIT Indicator variable that takes the value of one (zero) for projects that include a new unit (substantial expansion)
STALL_ABANDON Indicator variable that takes the value of one for projects categorized as stalled or abandoned, and zero otherwise
COST The natural logarithm of the total cost of all the projects announced by a firm
Appendix A2. Controlling for additional variables
controlling shareholders and zero otherwise, FIRMSIZE is the natural logarithm of the beginning of the year book value of total assets, TOBINQ is the natural log of
Tobin’s Q, CASHFLOW is operating cash flow divided by total assets, LEV is calculated as total debt divided by total assets, DIVIDEND is the dividend paid divided by
total assets, INDPROM_OWN (INST_OWN) represent the proportion of equity held by domestic controlling shareholders (institutional investors), FII is one for firms
with foreign institutional investors and zero otherwise, LARGE_BOARD is one (zero) if the board size is larger (smaller) than sample median board size,
INDEP_BOARD is the proportion of independent directors on the board, BUSY_BOARD is one if there are at least three directors who serve on other companies’
boards and zero otherwise, ILLIQ is the measure of stock illiquidity calculated by following Amihud (2002), AQ is a measure of accrual quality calculated by
following Dechow and Dichev (2002), FIRMAGE is the age of the firm counted from the year of incorporation, CASH is the amount of cash holdings, CMPTN is the
measure of industry competitiveness, and HP is the measure of financial constraints calculated by following Hadlock and Pierce (2010). All regressions include
industry and year fixed effects (FE). t-statistics calculated using robust standard errors and clustered at the firm level are reported in parentheses. ***, **, and *
indicate 1, 5, and 10 % significance levels, respectively. The sample period for this study is from 2001 (financial year beginning on April 1, 2000 and ending on
(1) (2) (3) (4)
INDPROM_OWN, INST_OWN, LARGE, INDEP, and INDPROM_OWN, INST_OWN, FII, LARGE, ILLIQ, AQ, FIRMAGE, CASH,
and FII BUSY INDEP, and BUSY CMPTN, and HP
FRGNPROM − 0.006 − 0.005 − 0.005 − 0.005

(-2.579)*** (-2.860)*** (-2.270)** (-2.604)***
FIRMSIZE − 0.001 − 0.003 − 0.002 − 0.002
(-1.989)** (-5.188)*** (-1.829)* (-4.283)***
TOBINQ 0.036 0.035 0.036 0.036
(14.457)*** (15.605)*** (13.358)*** (15.652)***
CASHFLOW 0.126 0.122 0.131 0.123
(14.534)*** (16.449)*** (13.416)*** (17.012)***
LEV 0.046 0.049 0.055 0.044
(10.953)*** (13.280)*** (11.975)*** (11.966)***
DIVIDEND 0.098 0.114 0.062 0.175
− 1.567 (1.900)* − 0.952 (2.764)***
INDPROM_OWN 0.006 0.005
− 1.331 − 0.913
INST_OWN − 0.011 − 0.004
(-0.876) (-0.309)
FII − 0.001 − 0.01
(-0.077) (-0.542)
LARGE_BOARD 0.003 0.002
(2.314)** − 1.153
INDEP_BOARD − 0.001 0.000
(-0.864) (-0.195)
BUSY_BOARD − 0.002 − 0.004
(-1.385) (-2.192)**
ILLIQ − 26.704
(-6.770)***
AQ − 0.034
(-3.588)***
FIRMAGE 0
(-5.745)***
CASH 0.054
− 0.375
CMPTN 0
(3.228)***
HP 0.008
(1.666)*
CONSTANT 0.018 0.032 0.026 0.071
(2.043)** (3.204)*** (1.776)* (4.570)***
INDUSTRY FE YES YES YES YES
YEAR FE YES YES YES YES
N 15,661 20,795 13,003 21,832
Adj-R2 0.188 0.168 0.201 0.167
22
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J. Int. Financ. Markets Inst.

Money 80 (2022) 101613

Contents lists available at ScienceDirect

Journal of International Financial Markets,

Foreign controlling shareholders and corporate investment

2. Promoter ownership in Indian companies

2.1. Foreign controlling shareholders

3. Theoretical motivation and related literature

(1) (2) (3) (4) (5) (6) (7) (8)

Year N FRGNPROM_OWN (%) CAPEX (%) N CAPEX (%)

Mean Median Mean Median Mean Median

2001 220 31.274 29.740 5.233 3.251 698 6.187 3.608

(1) (2) (3) (4) (5) (6) (7) (8)

Industry FRGNCTRL-Firms NONFRGN-Firms

FRGNPROM_OWN CAPEX (%) CAPEX (%)

N Mean Median Mean Median N Mean Median

(1) (2) (3) (4) (5) (6)

CAPEX 27,821 6.287 3.443 1.155 8.196 7.887

(1) (2) (3) (4) (5) (6) (7)

(1) (2) (3) (4) (5) (6)

CAPEX 5.848 3.044 5.771 3.395 0.076 − 0.350***

FRGNPROM − 0.006 − 0.004 − 0.006 − 0.001 0.000 − 0.001

FRGN_PCT (26–51 − 0.014

Journal of International Financial Markets, Institutions & Money 80 (2022) 101613

presented in graphical form in Fig. 2.

CAPEX i,t+1 = α0 + β 1 FRGNPROM i, t + β2 FIRMSIZEi, t + β3 TOBINQi, t + β4 CASHFLOW i, t + β5 LEV i, t + β6 DIVIDENDi, t

5.1. Main results

Endogenous Variable: FRGNPROM Endogenous Variable: FRGNPROM_OWN

(1) (2) (3) (4)

First Stage Second Stage First Stage Second Stage

F-statistic (p-value) 47.16 (0.000) 2032.17 (0.000)

5.2. Endogeneity tests

5.2.1. Two stage least squares estimation

Mean Median Mean Median

CAPEX 4.520 2.974 5.155 2.994 − 0.635* − 0.020

R1 Control Firms 0.038 0.035 − 0.004 4.520 4.603 − 0.083

POST × TREATMENT − 0.012

(1) (2) (3) (4) (5) (6)

Domestic Controlling Institutional Investors Foreign Institutional Investors

FRGNPROM − 0.004 − 0.019 − 0.007 − 0.006 − 0.008 − 0.007

5.2.2. Difference-in-Differences analysis

foreign controlling shareholders (Hypothesis 3b).

5.4. Firm characteristics

5.5. Investment efficiency

Small Firms Large Firms

FRGNPROM − 0.005 − 0.006

High Stock illiquidity Low Stock illiquidity

FRGNPROM − 0.006 − 0.005

Good Accrual quality Poor Accrual quality

FRGNPROM − 0.006 − 0.005

Young (incorporation age) Old (incorporation age)

FRGNPROM − 0.010 − 0.003

Young (listing age) Old (listing age)

FRGNPROM − 0.009 − 0.003

FRGNPROM − 0.004 − 0.007

Low Competition High Competition

FRGNPROM − 0.007 − 0.005

Financially unconstrained Financially constrained

FRGNPROM − 0.005 − 0.001

Financially unconstrained Financially constrained

(1) (2) (3) (4) (5) (6) (7) (8)

Sales Growth Tobin’s Q Sales Growth Tobin’s Q

Under-INV Over-INV Under-INV Over-INV Under-INV Over-INV Under-INV Over-INV

COMPLETION 2.766 2.100 2.559 1.890 0.206* 0.210*