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Diversification and tunneling: Evidence from Indian business groups

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  • Kali, Raja
  • Sarkar, Jayati

Abstract

We provide evidence suggesting an important yet largely unexplored motive for the diversified structure of emerging economy business groups is to facilitate expropriation of minority shareholders by controlling insiders through tunneling. Using firm level panel data from India, and defining the core firm of a group as the one with the largest asset base, we find that the relatedness of the activity of a group affiliate to the activity of the core firm is correlated with the wedge between control and cash flow rights of insiders as well as with the opacity in insider ownership. Firms with ownership-control wedge lower and ownership opacity higher relative to a group's core firm are more likely to be in activities unrelated to that of the core firm. Our findings are strengthened by evidence of tunneling in the same direction, from affiliates with wedge equal to or higher than that of the core firm to affiliates with wedge lower than that of the core firm. Taken together this suggests an expropriation motive for diversification: affiliate firms are located away from a business group's core firm to serve as destination points for funds tunneled from the group's core.

Suggested Citation

  • Kali, Raja & Sarkar, Jayati, 2011. "Diversification and tunneling: Evidence from Indian business groups," Journal of Comparative Economics, Elsevier, vol. 39(3), pages 349-367, September.
  • Handle: RePEc:eee:jcecon:v:39:y:2011:i:3:p:349-367
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    References listed on IDEAS

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    Cited by:

    1. Shreya Biswas, 2016. "Promoter Homophily in Boards: Does it Really Matter? - An Analysis of Indian Firms," Economics Bulletin, AccessEcon, vol. 36(1), pages 237-252.
    2. repec:eee:worbus:v:53:y:2018:i:2:p:104-117 is not listed on IDEAS
    3. repec:eee:jocaae:v:11:y:2015:i:2:p:121-137 is not listed on IDEAS
    4. Giovanni Ferri & Pierluigi Murro & Marco Pini, 2018. "Credit Rationing and the Relationship Between Family Businesses and Banks in Italy," CERBE Working Papers wpC24, CERBE Center for Relationship Banking and Economics.

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