Investors' preferences and the factors affecting investment in the Indian stock market: an industry view

Abstract

PurposeThe authors examine the industrywise investment preferences of foreign portfolio investors (FPIs), domestic institutional investors (DIIs) and retail investors in the Indian context. They also investigate the factors influencing their preferences.Design/methodology/approachUsing the quarterly shareholdings and returns data of the Indian market from March 31, 2009 to March 31, 2018, the authors employ analysis of variance to study investors' preferences and a random effect panel data model to examine the factors that influence these preferences.FindingsFPIs hold proportionally more stocks in service-oriented industries and large-cap firms, DIIs hold proportionally large numbers of shares in paper industries and retail investors hold proportionally more shares in chemicals and textiles. FPIs prefer stocks with a high export-to-sales ratio and firms registered on a foreign stock market. Domestic investors, especially retail investors, prefer small-cap stocks and firms whose operations require local knowledge. In addition, industry heterogeneity determines investment decisions. Firm-specific and macroeconomic factors that influence investment decisions differ across industries. Finally, government policies and reforms also play a key role in attracting investors.Practical implicationsPolicymakers can identify the key variables that influence investment, which can help direct and regulate investment in India and similar emerging markets.Originality/valueThis study fills a research gap by addressing how industry-level heterogeneity affects investors' preferences in terms of the industrywise preferences of different types of investors and the factors that influence their preferences.