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Impact of M&A on firm performance in India: Implications for concentration of ownership and insider entrenchment

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  • Sumon Kumar Bhaumik

    ()

  • Ekta Selarka

Abstract

performance. On the one hand, concentration of ownership that, in turn, concentrates management control in the hands of a strategic investor, eliminates agency problems associated with dispersed ownership. On the other hand, it may lead to entrenchment of upper management which may be inconsistent with the objective of profit (or value) maximisation. This paper examines the impact of M&A on profitability of firms in India, where the corporate landscape is dominated by family-owned and group-affiliated businesses, such that alignment of management and ownership coexists with management entrenchment, and draws conclusions about the impact of concentrated ownership and entrenchment of ownermanagers on firm performance. Our results indicate that, during the 1995-2002 period, M&A in India led to deterioration in firm performance. We also find that neither the investors in the equity market nor the debt holders can be relied upon to discipline errant (and entrenched) management. In other words, on balance, negative effects of entrenchment of ownermanagers trumps the positive effects of reduction in owner-vs.-manager agency problems. Our findings are consistent with bulk of the existing literature on family-owned and group affiliated firms in India.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp907.

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Length: pages
Date of creation: 01 Feb 2008
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Handle: RePEc:wdi:papers:2008-907

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Keywords: mergers and acquisitions; corporate governance; manager entrenchment; firm performance; India;

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Cited by:
  1. Sinha, Pankaj & Gupta, Sushant, 2011. "Mergers and Acquisitions: A pre-post analysis for the Indian financial services sector," MPRA Paper 31253, University Library of Munich, Germany.
  2. Bhaumik, Sumon Kumar & Kumbhakar, Subal C., 2010. "Is the post-reform growth of the Indian manufacturing sector efficiency driven? Empirical evidence from plant-level data," Journal of Asian Economics, Elsevier, Elsevier, vol. 21(2), pages 219-232, April.

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