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Emerging Market Business Groups, Foreign Investors, and Corporate Governance

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  • Tarun Khanna
  • Krishna Palepu
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    Abstract

    We examine the interaction between three kinds of concentrated owners commonly found in an emerging market: family-run business groups, domestic financial institutions, and foreign financial institutions. Using data from India in the early 1990s, we find evidence that domestic international investors are poor monitors, and that foreign institutional investors are good monitors. Whereas affiliates of those groups that attract foreign institutional investment are no more difficult to monitor than are unaffiliated firms, we find that group affiliation reduces the likelihood of foreign institutional investment. More transparent groups (where greater transparency is proxied for by a lower incidence of intra-group financial transactions) are more likely to attract such investment. We conclude that groups are difficult to monitor, and that foreign institutional investors serve a valuable monitoring function as emerging markets integrate with the global economy.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6955.

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    Date of creation: Feb 1999
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    Publication status: published as Khanna, Tarun and Krishan Palepu. "Is Group Affiliation Profitable In Emerging Markets? An Analysis Of Diversified Indian Business Groups," Journal of Finance, 2000, v55(2,Apr), 867-891.
    Handle: RePEc:nbr:nberwo:6955

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    1. Shleifer, Andrei & Vishny, Robert W., 1986. "Large Shareholders and Corporate Control," Scholarly Articles 3606237, Harvard University Department of Economics.
    2. Holderness, Clifford G. & Sheehan, Dennis P., 1991. "Monitoring an owner*1: The case of Turner broadcasting," Journal of Financial Economics, Elsevier, Elsevier, vol. 30(2), pages 325-346, December.
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    Cited by:
    1. Gleason, Kimberly C. & Madura, Jeff & Subrahmanyam, Vijaya, 2007. "Stock exchange governance initiatives: Evidence from the Italian STARs," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(1), pages 141-159, January.
    2. Haselmann, Rainer & Wachtel, Paul, 2011. "Foreign banks in syndicated loan markets," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(10), pages 2679-2689, October.
    3. Choi, Jong-Seo & Kwak, Young-Min & Choe, Chongwoo, 2012. "Earnings management surrounding CEO turnover: evidence from Korea," MPRA Paper 40629, University Library of Munich, Germany.
    4. Erik Berglof & Ernst-Ludwig von Thadden, 1999. "The Changing Corporate Governance Paradigm: Implications for Transition and Developing Countries," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 263, William Davidson Institute at the University of Michigan.
    5. Chinmay Pattnaik & James Chang & Hyun Shin, 2013. "Business groups and corporate transparency in emerging markets: Empirical evidence from India," Asia Pacific Journal of Management, Springer, Springer, vol. 30(4), pages 987-1004, December.
    6. Garner, Jacqueline L. & Kim, Won Yong, 2013. "Are foreign investors really beneficial? Evidence from South Korea," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 25(C), pages 62-84.
    7. Nasha Ananchotikul, 2008. "Does Foreign Direct Investment Really Improve Corporate Governance? Evidence from Thailand," Working Papers, Economic Research Department, Bank of Thailand 2008-09, Economic Research Department, Bank of Thailand.
    8. Michael S. Gibson, 1999. "Is corporate governance ineffective in emerging markets?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1999-63, Board of Governors of the Federal Reserve System (U.S.).
    9. Knill, April M., 2005. "Taking the bad with the good : volatility of foreign portfolio investment and financial constraints of small firms," Policy Research Working Paper Series, The World Bank 3797, The World Bank.
    10. Wiwattanakantang, Yupana, 2001. "Controlling Shareholders and Corporate Value: Evidence from Thailand," CEI Working Paper Series, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University 2001-4, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    11. Rhee, S. Ghon & Wang, Jianxin, 2009. "Foreign institutional ownership and stock market liquidity: Evidence from Indonesia," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(7), pages 1312-1324, July.
    12. Emiliano Carlo, 2014. "Pyramids and the separation between direction and control of non-financial Italian family companies," Journal of Management and Governance, Springer, Springer, vol. 18(3), pages 835-872, August.
    13. Philippe DULBECCO & Jean-Pierre ALLEGRET & COURBIS, 1999. "Financial Liberalisation and Stability of the Financial System in Emerging Markets: the institutional dimension of financial crises," Working Papers 199918, CERDI.
    14. Wang, Jianxin, 2007. "Foreign equity trading and emerging market volatility: Evidence from Indonesia and Thailand," Journal of Development Economics, Elsevier, Elsevier, vol. 84(2), pages 798-811, November.
    15. Godfred A. Bokpin & Zangina Isshaq & Francis Aboagye-Otchere, 2011. "Ownership structure, corporate governance and corporate liquidity policy: Evidence from the Ghana Stock Exchange," Journal of Financial Economic Policy, Emerald Group Publishing, Emerald Group Publishing, vol. 3(3), pages 262-279, August.
    16. Laura Beny, . "A Comparative Empirical Investigation of Agency and Market Theories of Insider Trading," University of Michigan John M. Olin Center for Law & Economics Working Paper Series, University of Michigan John M. Olin Center for Law & Economics umichlwps-1003, University of Michigan John M. Olin Center for Law & Economics.
    17. Kim, Woochan & Kim, Woojin & Kwon, Kap-Sok, 2009. "Value of outside blockholder activism: Evidence from the switchers," Journal of Corporate Finance, Elsevier, Elsevier, vol. 15(4), pages 505-522, September.
    18. Cheong, Kwang Soo & Choo, Kineung & Lee, Keun, 2010. "Understanding the behavior of business groups: A dynamic model and empirical analysis," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 76(2), pages 141-152, November.
    19. Jeon, Jin Q & Moffett, Clay M., 2010. "Herding by foreign investors and emerging market equity returns: Evidence from Korea," International Review of Economics & Finance, Elsevier, Elsevier, vol. 19(4), pages 698-710, October.
    20. Aivazian, Varouj A. & Ge, Ying & Qiu, Jiaping, 2005. "Corporate governance and manager turnover: An unusual social experiment," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(6), pages 1459-1481, June.
    21. Petia Topalova, 2004. "Overview of the Indian Corporate Sector: 1989-2002," IMF Working Papers, International Monetary Fund 04/64, International Monetary Fund.

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