Business Group Affiliated Firms Research Articles

Riding on information-based advantages: Business group affiliation and cross-border acquisition completion

This study examines the impact of business group affiliation on the likelihood of completing cross-border acquisitions. Drawing on information asymmetry theory, we hypothesize that business group–affiliated firms are more likely to complete cross-border acquisition deals than standalone firms. Recognizing the role of formal and informal institutions in shaping information asymmetry in cross-border acquisition transactions, we also investigate the contingent effects of regulatory quality distance (a formal institutional factor) and cultural distance (an informal institutional factor) on the above relationship. Our empirical analysis, based on a sample of 1293 cross-border acquisition deals announced by Indian firms between 2000 and 2017, offers interesting insights. Specifically, we find that business group affiliation positively influences the likelihood of cross-border acquisition completion and that regulatory quality distance between the home and host countries attenuates this effect. However, contrary to our expectations, cultural distance also attenuates the positive impact of business group affiliation on cross-border acquisition completion, challenging the expectation that business group affiliation advantages would mitigate information asymmetry across all contexts. Thus, our study underscores the context-dependent nature of business group affiliation advantages, which are shaped by formal and informal institutional factors in cross-border acquisitions.

Advancing understanding of ESG score and executive compensation relationships in the Indian context

This study examines the impact of environmental, social, and corporate governance (ESG) performance metrics on executive compensation in India using a sample of top-listed firms from 2007 to 2021 and controls for various firm-level characteristics. Findings show that a higher ESG score is associated with higher executive compensation. The subsample analyses examines how business-group affiliations and environmental sensitivity affect executive compensation. Results reveal that business-group affiliated firms with higher ESG scores tend to have higher executive compensation than nonaffiliated firms. Moreover, environmentally sensitive firms with higher governance pillar scores, which represent better governance practices, show higher executive compensation. Finally, high ESG scores and executive compensation is associated with better firm performance.

Business Group’s Performance: Market and Non-Market Measures in Pakistan

This study examines the influence of market and non-market strategies on the financial performance of firms affiliated with business groups. The study analyzed 136 non-financial firms affiliated with business groups, listed on the Pakistan Stock Exchange for the period 2010 to 2020. Market strategies focused on firm related resources diversification, financial constraints and internal capital generation rate. Whereas, non-market strategies focused on political connections and corporate social responsibility. Using fixed effect panel regression model, we found that for business-group firms, both market and non-market strategies significantly increase financial performance. Diversification, financial constraints and internal capital generation drive market success, while political connections and strong corporate social responsibility contribute through non-market measures. This suggested that business group affiliated firms should carefully choose a mix of market and non-market resources for optimal performance. This is also suggested that regulatory authorities shall introduce such policies that smoothen the business operations and encourage managers of affiliated firms to employ more combinations of market and non-market resources to get competitive advantage and promote responsible business practices within the groups.

Share pledging by controlling shareholders and accounting conservatism: evidence from India

PurposeThe purpose of this paper is to examine the relationship between accounting conservatism and pledging of shares by controlling shareholders of a firm to obtain a loan. The pledging of shares by the controlling shareholders of a firm results in alterations to the payoff and risk structure for these shareholders. Since accounting numbers have valuation implications, pledging of shares by a controlling shareholder has an impact on accounting policy choices made by the firm. The purpose of this paper is to examine the impact of controlling shareholder share pledging to obtain a loan on a specific accounting policy choice, namely, conservatism.Design/methodology/approachThe paper uses a large data set from India comprising 14,786 firm years consisting of 1,570 firms belonging to 58 industries for a period of 11 years (2009–2019). The authors use ordinary least square regression with robust standard errors. The authors conduct robustness checks and the results are consistent across alternative statistical methodologies and alternative measures of the primary dependent and independent variables.FindingsThe primary results show that pledging of shares by the controlling shareholders results in higher conditional conservatism and lower unconditional conservatism. Further analysis reveals that the relationship is stronger when the controlling shareholder holds a majority ownership in the firm. Additionally, the results show that for business group affiliated firms, which are unique to developing countries, both the conditional and the unconditional conservatism are incrementally lower when the controlling shareholder pledges the shares. For family firms with a family member as CEO, the conditional conservatism is incrementally higher and the unconditional conservatism is incrementally lower. Finally, the authors show that the results hold when the pledge intensity variable is measured with a one-year lag and finally, the authors show that conditional conservatism is incrementally higher in the year of the increase in the pledge and the year after, but there is no such incremental impact on unconditional conservatism.Research limitations/implicationsThe research is limited to the listed firms in India. Since majority of the listed firms are controlled by families and the family firms around the world are heterogeneous the findings of the research may not be applicable to other countries.Practical implicationsThe study has implications for policy-making and monitoring of the pledging by the controlling shareholders. It also helps the investors in making investment decisions with respect to family firms in India.Originality/valueThe study is unique as it focuses on the relationship between pledging of shares by the controlling shareholders and its impact on accounting conservatism. To the best of the authors’ knowledge, this is the first research integrating these two aspects.

The impact of business group affiliation on CO2 emissions: evidence from Chile

ObjetivoEste estudio tiene como objetivo investigar la relación entre la afiliación a grupos empresariales y las emisiones de CO2 en Chile, proporcionando información sobre las externalidades de contaminación asociadas con las estructuras de grupos empresariales y sus implicaciones para el desempeño ambiental de las empresas.Diseño/Metodología/AproximaciónSe utilizó una muestra recolectada de manera manual de instalaciones industriales y subsidiarias de empresas listadas en Chile para analizar las emisiones de CO2 de empresas afiliadas a grupos empresariales en comparación con empresas independientes. Se emplearon análisis de regresión de efectos fijos y modelos de emparejamiento por puntaje de propensión para examinar las diferencias en los niveles de emisiones.HallazgosLos resultados sugieren que las empresas afiliadas a grupos empresariales tienen mayores emisiones de CO2 en comparación con empresas independientes similares. Esto sugiere que las estructuras de grupos empresariales pueden debilitar las presiones para la reducción de emisiones y el mantenimiento de la legitimidad pública entre las empresas afiliadas.OriginalidadEste estudio contribuye a la literatura sobre gobierno corporativo, riesgos climáticos y externalidades de contaminación al proporcionar evidencia empírica sobre la relación entre la afiliación a grupos empresariales y las emisiones de CO2. Destaca la importancia de considerar la influencia de las estructuras corporativas en el rendimiento ambiental, especialmente en el contexto de las economías de mercados emergentes.Limitaciones/Implicaciones de la InvestigaciónLos hallazgos de este estudio están sujetos a ciertas limitaciones, como el uso de un conjunto de datos específico de Chile y la incapacidad para explorar ciertos factores debido a restricciones de datos. Por ejemplo, no pudimos examinar la influencia de las características de los ejecutivos de las empresas en los niveles de contaminación. Investigaciones futuras deberían abordar estas limitaciones y ampliar el análisis a otros países de mercados emergentes para investigar más a fondo el impacto de regulaciones ambientales laxas o ineficaces en los resultados de contaminación.Implicaciones PrácticasLos hallazgos de la investigación tienen implicaciones prácticas para inversores y responsables políticos. Los inversores interesados en inversiones ambientalmente sostenibles deben tener en cuenta los niveles más altos de contaminación asociados con empresas afiliadas a grupos empresariales. Los responsables políticos pueden utilizar estos hallazgos para diseñar regulaciones más efectivas e incentivos para fomentar los esfuerzos de reducción de emisiones dentro de las estructuras de grupos empresariales.Implicaciones SocialesLos resultados del estudio enfatizan la necesidad de comprender de manera integral las implicaciones ambientales de la afiliación a grupos empresariales. Al reconocer el potencial de mayores emisiones en las estructuras de grupos empresariales, los interesados pueden abogar por prácticas sostenibles, fomentar la transparencia y promover una gestión ambiental responsable dentro de las entidades corporativas.

Geopolitical risk and investment-cash flow sensitivity: An empirical analysis for Indian business group-affiliated firms and non-business group-affiliated firms

This study empirically examines the effect of GPR (geopolitical risk) on investment–cash flow sensitivity of Indian business group-affiliated firms and non-business group-affiliated (independent) firms. This study finds that GPR increases investment–cash flow sensitivity. Further, this study reveals that the impact of GPR on investment–cash flow sensitivity is less (greater) for business group-affiliated (independent) firms. In addition, the results of this study are robust across alternate measurements of the GPR (GPR Threat & GPR Act), dependent variable, and excluding the crisis & COVID-19 period.

Boundaries of the firm and real earnings management

Despite harmful effects, Real Earnings Management (REM) is increasingly becoming a more popular method of earnings management than Accruals based Earnings Management (AEM) (Cohen et al., 2008; Commerford et al., 2018). We argue that when a firm’s organizational structure has extended boundaries with other firms, the benefits due to REM can outweigh the costs. We use family business groups, that extend firm boundaries with other affiliated firms, for testing our conjecture. Using a large dataset of 11,417 firm-year observations of Indian firms, we show that REM is significantly higher in business group affiliated firms compared to standalone firms. Further, intra-group transactions, in the form of purchases, sales, and cash flows from operating activities, contribute to higher REM activities. More importantly, when group affiliated firms engage in intragroup transactions and report higher REM, mainly in the form of abnormal production, they experience an increase in their future profitability and a decrease in their cost of equity.

Returns to Internationalization: Business Group-Affiliated Firms vs Standalone Firms

The purpose of this study is to explore the differential gains from internationalization for different forms of corporate governance. In particular, we seek to move from the question concerning whether firms are able to generate differential gains from internationalization, to the question of why. Our focus is on ownership structure, and the differential rates at which business group affiliated firms and standalone firms gain from internationalization. Using a unique data set of some 356 standalone and business group affiliated firms, we show that while the marginal gains from internationalization may be greater for standalone firms, business group firms are better able to exploit firm-specific assets, leveraging these into higher returns to internationalization.

Does culture diversity affect innovation? Evidence from Chinese business group affiliated firms

We analyze how intra-group culture diversity affect group affiliated firm’s innovation. Our findings suggest that the more inconsistency on risk preference among affiliated firms in one group, the less impact of affiliated firm’s own risk culture on innovation. Specifically, we document that intra-group culture diversity impedes individual affiliated firm’s innovation through managerial and controlling agency problems. The heterogeneity test shows that size, executives, headquarter connected, location, state ownership and information quality of affiliated firms can affect intra-group culture diversity on innovation. We prove that intra-group culture diversity impedes innovation on group affiliated firms, which means a dark side of business group affiliation.

The role of Business Group Affiliation on the Determination of Firm's Dividend Policy Decisions: Evidence from India

This research article examines the role of business group affiliation on the determination of firm’s dividend policy decisions (i.e. dividend payment decision and dividend payout level decision) for 703 National Stock Exchange (NSE) listed Indian firms during 1995-2018. In order to analyze the dividend payment decision (i.e. whether to distribute or not to distribute dividend?) a dichotomous logit regression analysis is utilized on the other hand, for the purpose of analyzing the dividend payout-level decision (i.e. how much amount of dividend to be distributed out of total earnings?) a tobit or censored regression analysis is utilized. The study finds from the comparative analysis that the dividend payout ratios of firms affiliated with the business groups are higher than that of unaffiliated firms (i.e. standalone firms). The econometric analysis indicates that the firms’ affiliation with the business groups have a direct association with the likelihood of firms paying dividends. The firms affiliated with the business groups are more likely to distribute dividends and their dividend payout levels are higher than the unaffiliated firms (i.e. standalone firms). The dividend policy decisions of business group affiliated firms are less sensitive to size, profitability, investment opportunities, financial leverage and firm’s life-cycle stage on the other hand, they are more sensitive to free cash flow and business risk.

Business groups and corporate bond costs: Evidence from China

We examine the effect of business groups on corporate bond costs. Using a sample of corporate bonds issued by Chinese privately owned firms from 2007 to 2019, we show that business group-affiliated firms issue bonds at higher yield spreads than independent firms. The results hold after addressing the endogeneity issues of self-selection, selection bias, and financing decisions. We do not find that corporate governance plays a role in mitigating the negative impact of business groups on bond costs. Business groups negatively affect bond costs through tunneling and risk spillover channels, whereas financing advantage is not a transmission channel.

A Social Capital Perspective to Explain Internationalization of Business Group Affiliated Firms

We construct a theoretical framework that offers two different forms (primary and secondary) of social capital to explain the mechanisms behind internationalization of business group (BG) affiliated firms. We propose that BG level interorganizational network ties creates domestic focus opportunity-motivation-ability in affiliated firm which is detrimental to affiliate level degree of internationalization. We further propose that affiliate level internal network configuration (combined effect of network density and network hierarchy) and external network relation (combined effect of trust and identification) create international focus opportunity-motivation-ability and alleviate negative effect of network ties on affiliate’s degree of internationalization. Our theoretical framework contributes to the global strategy of BG research where the key concepts of networks, social capital, and organizational international strategy intersect.

Economic policy uncertainty and investment-cash flow sensitivity: evidence from India

PurposeThis study examines the impact of economic policy uncertainty (EPU) on the investment-cash flow sensitivity (ICFS) of Indian manufacturing firms.Design/methodology/approachThis study uses the fixed-effect method to investigate the effect of EPU on ICFS from 2004 to 2019.FindingsThis study finds that EPU increases ICFS, which is more (less) during the crisis (before and post-crisis) period. The authors also find that the effect of EPU on ICFS is more for smaller, younger and standalone (SA) firms than the larger, matured and business group affiliated (BGA) firms. This study also reveals that EPU reduces corporate investment (CI). Further, the authors find that cash flow is more significant for the investment of financially constrained firms and the negative effect of EPU is more for these firms.Research limitations/implicationsThis study considers the Indian manufacturing sector. Therefore, this study can be extended by analyzing the relationship between EPU and ICFS for the service sector.Practical implicationsFirst, this study can be useful for corporates, academicians and government bodies to understand the effect of EPU on ICFS and CI. Second, this study will help corporates to focus on internal funds to finance corporates' investment during the crisis period because EPU increases the cost of external finance which may increase ICFS and reduce CI. Third, lending agencies, investors and stakeholders should also focus on the firm's nature, ownership, size and age because these factors play a crucial role to reduce or increase the negative effect of EPU on ICFS. Fourth, the Government should make appropriate policy measures in terms of concessional interest rates to increase the easy availability of external finance for SA, small size, and young firms to reduce the negative effect of EPU on CI because these firms are considered as more financially constrained firms.Originality/valueThis study adds new inputs to the current literature of EPU in several ways. First, this study is one of the main studies focused on the relationship between EPU and ICFS (CI). Especially in emerging countries like India, examining this relationship extends previous research. Second, this study also examines the impact of EPU on ICFS for BGA, SA, small, large, matured and young firms as well as crisis and non-crisis periods. Third, this study uses the sample of the Indian manufacturing sector which has emerged the qualities to become a global manufacturing hub and attracting global investors. Therefore, examining the effect of EPU on ICFS for these firms will be more interesting.

Role of international strategic alliances in internationalization of business group affiliated firms—A system dynamics approach

AbstractInterest in business groups (BGs) and international strategic alliances (ISAs) has been of interest in recent times for both academics and practice. However, there are scant studies on the interface of ISAs of BGs and their internationalization performance. This study aims to explore the role of ISAs in the internationalization of BG affiliated firms (BGAFs) by taking a system dynamics approach. The paper explores how different configurations of ISA (motive, scope, structure, orientation and partner) and BG characteristics (diversity, ownership heterogeneity and resource endowment) impact the degree of internationalization (DOI) and financial performance of firms. The model was validated on 17 BGAFs across 8 diverse industrial sectors, subsequent to simulation studies of 60 variables manifesting in 6336 ISAs formed by 405 BGAFs and 440 Non‐BGAFs. Our findings suggest a curvilinear relationship between DOI and financial performance of BGAFs.

How do business group affiliated firm in emerging markets outperform standalone firms? A knowledge-based view

PurposeThis study seeks to understand how business group-affiliated firms perform in emerging markets. Previous studies identify that in spite of changes in the competitive landscape, seemingly counter-intuitively, business group affiliates outperform their standalone counterparts in emerging markets. This study adopts a knowledge-based view to resolve this apparent paradox.Design/methodology/approachThis study uses a problematization methodology to qualitatively analyze the strategic decisions of Indian business group-affiliated firms. This study cross-validates their analysis with the empirical results available in published academic and practitioner articles.FindingsPrevious studies explain this outperformance paradox based on assumptions that include filling institutional voids, access to strategic resources and leveraging political connections. By questioning these assumptions, this study identifies an alternative explanation that is based on affiliates’ ability to adopt a strategic approach that balances knowledge capital acquired through international expansion and innovation.Practical implicationsThe findings have important implications for managers of business group-affiliated firms in emerging markets, as well as for those in developed markets seeking to compete or collaborate in emerging markets.Originality/valueThis study provides a framework for managers of business group affiliates to identify suitable pathways to higher levels of competitive advantage.

Does economic policy uncertainty affect trade credit and firm value in Korea? A comparison of chaebol vs. non-chaebol firms

This paper investigates how economic policy uncertainty (EPU) affects trade credit and firm value of business group-affiliated firms (chaebol firms) and stand-alone firms (non-chaebol firms) in Korea over the period 1994–2019. We find a robust negative relationship between EPU and trade credit for all Korean firms using alternative measures of EPU and trade credit. We also find evidence that small chaebol firms, being presumably more financially constrained in the post-Asian financial crisis period, tend to respond more fiercely to changes in EPU and curtail their trade credits in greater amounts compared to large chaebol firms and non-chaebol firms. Further analysis suggests that cutting trade receivables during periods of high EPU increases firm value, especially for small chaebol firms; however, this relationship is non-linear. Accordingly, trade receivables cutbacks during periods of elevated EPU only increase firm value up to a certain point, beyond which it leads to value erosion. Taken together, our findings confirm the intuitive projection that under Korea’s unique market settings, different chaebol groups respond differently to impending policy uncertainties.

Decisions on subnational locations in China during the early years of WTO membership: evidence from the experience of Taiwanese affiliates

ABSTRACTFew prior studies have addressed how subnational differences within a country affect a firmʻs decision on location. We propose that two market constraints, product market constraints and factor market constraints reflect subnational differences in emerging markets, such as China. In addition, the effect of the investment experience of business group affiliated firms (BGAFs) has been neglected in prior studies on location. We propose that learning from the investment experience of other BGAFs in a specific subnational location could reduce the negative relationship between decision on a location and the extent to which they invest in it. Our data consists of Taiwanese firms doing business in China during the emergence of the new WTO institution in China.

Is business group affiliation profitable in the emerging markets in the post-pandemic era? :

Indian economy has experienced a boom in outward FDI (OFDI) since 2006, which is primarily a two-stage process: one is the internationalization decision and the second is how much to internationalize. Indian firms have been actively making outward foreign direct investments (OFDI) in both developed and other emerging markets, amidst widespread institutional voids and without explicit support from policymakers. Erstwhile, business group affiliated firms were the major players for India's OFDI as being a part of the business group provided access to internal as well as external markets. Now, with the onset of Covid-19 and the new economic policy focused on "Atmanirbhar Bharat", there is an ambition for India to become an important player in the global supply chain. The paper definitely aims at providing a touch base for future research that encourages a structured dialogue between academia and policymakers and cross-disciplinary collaboration.

Patent- and trademark-seeking outward foreign direct investment by Chinese firms: The role of business group affiliation

AbstractWe examine the relationship between business group affiliation (BGA) of Chinese firms and their foreign acquisitive behavior in terms of technology and brand-oriented strategic assets. Drawing on new internalization, business group, and international business theory, we assert that Chinese business group affiliated firms will more likely pursue foreign acquisitions to seek strategic assets including patents but less likely to pursue foreign acquisitions to seek trademarks. Patents have non-location-bounded (NLB) properties that mean they can be exploited by the business group—not just the firm—back in the domestic market, while trademarks have location bounded (LB) properties that mean they are less easy to exploit by a business group domestically. Using a sample of 779 Chinese cross-border acquisitions between 2006 and 2015, we find support for arguments relating to the differences in relative attractiveness of targets holding patents vs. trademarks for Chinese firms linked to business groups. We discuss how this better helps us understand emerging market MNEs and related theory.

Production Suspension, Corporate Governance, and Firm Value

ABSTRACT This study investigates the effects of planned and unplanned production suspension on firm value. We find that the increased business risk caused by the production suspension negatively affects firm value. Additionally, good corporate governance alleviates the negative effect of planned suspensions, while only firm-specific factors affect unplanned suspensions. Moreover, among firms facing unplanned suspensions, those with strong governance recover faster than firms with weak governance because the former have stable managerial structures. Finally, business group-affiliated firms cope with planned production suspensions well, whereas they are more vulnerable to unplanned suspensions. The result suggests that the group-level supplier-demander relationships have potential business risk owing to low flexibility in unexpected business situations.