What makes home bias abate? The evolution of foreign ownership of Indian firms

Between 2003 and 2007, the value of shares of Indian companies held by foreigners went up by roughly 13 times. This paper seeks to explain this event. A simple decomposition of changes in the value of foreign shareholding suggests a negative contribution owing to changes in insider shareholding (which actually went up), with the bulk of the change being contributed by the rise in Indian market capitalisation and the rise in foreign ownership as a fraction of outside shareholding. The exploration of foreign ownership as a fraction of outside shareholding leads to an emphasis on the set of zero-foreign-ownership companies. A selectivity model is estimated, where firms first graduate to be in the investment universe of foreign investors, and then achieve substantial foreign ownership. After controlling for firm characteristics in the context of this model, year fixed effects are largely stable. This suggests that the reduction in home bias was rooted in altered firm characteristics.