Foreign institutional investments and dividend payout policy: analyzing the bidirectional relationship

Purpose FII, the sought-after capital infuser by emerging economies, faces an agency issue as a minority investor. The dividend payout policy of an investee firm plays a critical role in regulating this issue. At the same time, firms may use it to attract the investors. This study explores the relationship between foreign institutional investors (FII) presence as a shareholder and their shareholding proportion (independent variables) with dividend payout policy in terms of dividend-paying behavior (dividend payer) and dividend payout proportion (dependent variable) and otherwise. Design/methodology/approach Considering the sample of 4,044 firm years during 2013–2023, the study uses the Tobit and Probit regression model to examine the relation between dividend-paying behavior and dividend payouts against FII presence and FII shareholding proportion. The study applies 2SLS for controlling endogeneity as a robustness check. Findings The results demonstrate that FII prefer firms that pay high dividends and self-select them. The Tobit model shows that FII presence induces dividend decisions, and the Probit models show that dividend payouts attract foreign shareholding. These effects are evident in firms with high profits, potential growth opportunities, higher leverage and lower cash flows. The FII influence is more significant when they have substantial shareholding. Firms with higher FII investments have more dividend payout and firms with higher dividend payout attract more FII investments. The study indicates that firms can use dividends as a signal for obtaining capital investments from FII. Originality/value This is the first study checking such a bidirectional relationship. For emerging economies, this can serve as a tool for attracting the capital. The research is also helpful for policymakers for regulatory purposes, considering the monitoring role of FII, executed through investment decisions in emerging economies.