We study the effect of foreign fund flows on asset prices by investigating the link between foreign
institutional investor (FII) flows and stock returns in India. Stocks experiencing high innovations
in FII order flow are associated with a permanent price increase, whereas stocks experiencing low
FII order flow innovations are associated with a partly-transient price decline. The differential
abnormal return between high and low innovation stocks is significant, largely unrelated to firm
characteristics, and increasing during periods of market stress. The findings are consistent with
price “pressure” induced by FII sales, as well as information being revealed through both FII
purchases and FII sales.