Diversification, propping and monitoring: Business groups, firm performance and the Indian economic transition
The industrial landscape of many emerging economies is characterized by diversified business groups. Given the well-known costs of diversification, their prevalence in emerging economies is a puzzle that has not been completely resolved. While there is evidence that business groups in emerging economies confer diversification benefits on group affiliated firms by substituting for missing institutions and markets, whether such benefits persist over the economic transition as institutions and markets develop is unclear. We investigate this issue in the context of the wide-ranging transformation of the Indian economy over the past decade. We find that business group affiliation continues to generate higher market valuation vis-…-vis standalone firms ten years into the transition, but diversification is not the source of these benefits. Instead, we find that propping through profit transfers among firms within a group and better monitoring through group level directorial interlocks explains the higher market valuation of business group affiliated firms. The effect of propping and directorial interlocks on firm value depends on the equity stakes of the controlling shareholders. Propping appears to be the source of group affiliation benefits in firms with below median cash flow rights of the controlling shareholders, while director interlocks are the primary source of the group effect for firms where the controlling shareholders have above median cash flow rights.
|Date of creation:||Nov 2005|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (022) 840 0919/20/21
Fax: (022) 840 2752/2026
Web page: http://www.igidr.ac.in
More information through EDIRC
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.:
- Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2002.
"Ferreting Out Tunneling: An Application To Indian Business Groups,"
The Quarterly Journal of Economics,
MIT Press, vol. 117(1), pages 121-148, February.
- 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.
- Lang, Larry H P & Stulz, Rene M, 1994.
"Tobin's q, Corporate Diversification, and Firm Performance,"
Journal of Political Economy,
University of Chicago Press, vol. 102(6), pages 1248-80, December.
- Larry H.P. Lang & Rene M. Stulz, 1993. "Tobin's Q, Corporate Diversification and Firm Performance," NBER Working Papers 4376, National Bureau of Economic Research, Inc.
- Berger, Philip G. & Ofek, Eli, 1995. "Diversification's effect on firm value," Journal of Financial Economics, Elsevier, vol. 37(1), pages 39-65, January.
- 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).
- 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.
- Gale, Bradley T, 1972. "Market Share and Rate of Return," The Review of Economics and Statistics, MIT Press, vol. 54(4), pages 412-23, November.
- Campa, Jose M. & Kedia, Simi, 2000.
"Explaining the diversification discount,"
IESE Research Papers
D/424, IESE Business School.
- Ghemawat, Pankaj & Khanna, Tarun, 1998. "The Nature of Diversified Business Groups: A Research Design and Two Case Studies," Journal of Industrial Economics, Wiley Blackwell, vol. 46(1), pages 35-61, March.
- Eric Friedman & Simon Johnson & Todd Mitton, 2003.
"Propping and Tunneling,"
NBER Working Papers
9949, National Bureau of Economic Research, Inc.
- Yan-leung Cheung & P. Raghavendra Rau & Aris Stouraitis, 2004.
"Tunneling, Propping and Expropriation Evidence from Connected arty Transactions in Hong Kong,"
092004, Hong Kong Institute for Monetary Research.
- 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.
- Karl Lins & Henri Servaes, 1999. "International Evidence on the Value of Corporate Diversification," Journal of Finance, American Finance Association, vol. 54(6), pages 2215-2239, December.
- Servaes, Henri, 1996. " The Value of Diversification during the Conglomerate Merger Wave," Journal of Finance, American Finance Association, vol. 51(4), pages 1201-25, September.
- Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
- Karl V. Lins & Henri Servaes, 2002. "Is Corporate Diversification Beneficial in Emerging Market?," Financial Management, Financial Management Association, vol. 31(2), Summer.
- Claessens, Stijn & Djankov, Simeon & Lang, Larry H. P., 2000. "The separation of ownership and control in East Asian Corporations," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 81-112.
- 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.
- 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.
- Tarun Khanna & Krishna Palepu, 1999. "Policy Shocks, Market Intermediaries, and Corporate Strategy: The Evolution of Business Groups in Chile and India," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(2), pages 271-310, 06.
When requesting a correction, please mention this item's handle: RePEc:ind:igiwpp:2005-006. 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: (Shamprasad M. Pujar)
If references are entirely missing, you can add them using this form.