Diversification and tunneling: Evidence from Indian business groups
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Yohanes E. Riyanto & Linda A. Toolsema, 2004.
"Tunneling and Propping: A Justification for Pyramidal Ownership,"
Departmental Working Papers
wp0409, National University of Singapore, Department of Economics.
- Riyanto, Yohanes E. & Toolsema, Linda A., 2008. "Tunneling and propping: A justification for pyramidal ownership," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2178-2187, October.
- Riyanto, Yohanes E. & Toolsema, Linda A., 2004. "Tunneling and Propping: A Justification for Pyramidal Ownership," Research Report 04E29, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
- Yohanes E. Riyanto & Linda A. Toolsema, 2004. "Tunneling and Propping: A Justification for Pyramidal Ownership," Econometric Society 2004 Far Eastern Meetings 639, Econometric Society.
- Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2002.
"Ferreting out Tunneling: An Application to Indian Business Groups,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 117(1), pages 121-148.
- Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2000. "Ferreting Out Tunneling: An Application to Indian Business Groups," NBER Working Papers 7952, National Bureau of Economic Research, Inc.
- Dewenter, Kathryn & Novaes, Walter & Pettway, Richard H, 2001. "Visibility versus Complexity in Business Groups: Evidence from Japanese Keiretsu," The Journal of Business, University of Chicago Press, vol. 74(1), pages 79-100, January.
- Jae-Seung Baek & Jun-Koo Kang & Inmoo Lee, 2006. "Business Groups and Tunneling: Evidencefrom Private Securities Offeringsby Korean Chaebols," Journal of Finance, American Finance Association, vol. 61(5), pages 2415-2449, October.
- Mike Peng & Andrew Delios, 2006. "What determines the scope of the firm over time and around the world? An Asia Pacific perspective," Asia Pacific Journal of Management, Springer, vol. 23(4), pages 385-405, December.
- Jang, Hasung & Kang, Hyung Cheol & Park, Kyung Suh, 2005. "The Choice of Group Structure: Divide and Rule," CEI Working Paper Series 2005-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
- Shleifer, Andrei & Vishny, Robert W, 1997.
" A Survey of Corporate Governance,"
Journal of Finance,
American Finance Association, vol. 52(2), pages 737-783, June.
- Andrei Shleifer & Robert W. Vishny, 1996. "A Survey of Corporate Governance," NBER Working Papers 5554, National Bureau of Economic Research, Inc.
- Andrei Shleifer & Robert W. Vishny, 1995. "A Survey of Corporate Governance," Harvard Institute of Economic Research Working Papers 1741, Harvard - Institute of Economic Research.
- Simeon Djankov & Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2005.
"The Law and Economics of Self-Dealing,"
NBER Working Papers
11883, National Bureau of Economic Research, Inc.
- Joh, Sung Wook, 2003. "Corporate governance and firm profitability: evidence from Korea before the economic crisis," Journal of Financial Economics, Elsevier, vol. 68(2), pages 287-322, May.
- Claessens, Stijn & Fan, Joseph P.H. & Lang, Larry H.P., 2006.
"The benefits and costs of group affiliation: Evidence from East Asia,"
Emerging Markets Review,
Elsevier, vol. 7(1), pages 1-26, March.
- Claessens, Stijn & Fan, Joseph P.H. & Lang, Larry, 2002. "The Benefits and Costs of Group Affiliation: Evidence from East Asia," CEPR Discussion Papers 3364, C.E.P.R. Discussion Papers.
- Claessens, Stijn & Fan, Joseph P.H. & Lang, Larry H.P., 2002. "The Benefits and Costs of Group Affiliation: Evidence from East Asia," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
- Cheung, Yan-Leung & Rau, P. Raghavendra & Stouraitis, Aris, 2006.
"Tunneling, propping, and expropriation: evidence from connected party transactions in Hong Kong,"
Journal of Financial Economics,
Elsevier, vol. 82(2), pages 343-386, November.
- Yan-leung Cheung & P. Raghavendra Rau & Aris Stouraitis, 2004. "Tunneling, Propping and Expropriation Evidence from Connected arty Transactions in Hong Kong," Working Papers 092004, Hong Kong Institute for Monetary Research.
- Heitor V. Almeida & Daniel Wolfenzon, 2006. "A Theory of Pyramidal Ownership and Family Business Groups," Journal of Finance, American Finance Association, vol. 61(6), pages 2637-2680, December.
- Friedman, Eric & Johnson, Simon & Mitton, Todd, 2003.
"Propping and tunneling,"
Journal of Comparative Economics,
Elsevier, vol. 31(4), pages 732-750, December.
- Leff, Nathaniel H, 1978. "Industrial Organization and Entrepreneurship in the Developing Countries: The Economic Groups," Economic Development and Cultural Change, University of Chicago Press, vol. 26(4), pages 661-675, July.
- Tarun Khanna & Krishna Palepu, 2000. "Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups," Journal of Finance, American Finance Association, vol. 55(2), pages 867-891, 04.
- Hyun-Han Shin & René M. Stulz, 1998. "Are Internal capital Markets Efficient?," The Quarterly Journal of Economics, Oxford University Press, vol. 113(2), pages 531-552.
- Stulz, ReneM., 1988. "Managerial control of voting rights : Financing policies and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 25-54, January.
- Montgomery, Cynthia A. & Hariharan, S., 1991. "Diversified expansion by large established firms," Journal of Economic Behavior & Organization, Elsevier, vol. 15(1), pages 71-89, January.
- Fan, Joseph P H & Lang, Larry H P, 2000. "The Measurement of Relatedness: An Application to Corporate Diversification," The Journal of Business, University of Chicago Press, vol. 73(4), pages 629-660, October.
- Tarun Khanna & Yishay Yafeh, 2007. "Business Groups in Emerging Markets: Paragons or Parasites?," Journal of Economic Literature, American Economic Association, vol. 45(2), pages 331-372, June.
- Karl V. Lins & Henri Servaes, 2002. "Is Corporate Diversification Beneficial in Emerging Market?," Financial Management, Financial Management Association, vol. 31(2), pages -, Summer.
When requesting a correction, please mention this item's handle: RePEc:eee:jcecon:v:39:y:2011:i:3:p:349-367. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.