Business Group Affiliated Firms Research Articles

The role of operating efficiency and asset productivity in relative performance evaluation and CEO compensation in Indian firms

The use of relative performance evaluation (RPE) to determine compensation improves contracting efficiency, reduces moral hazard, and provides effort incentive. This study investigates how RPE usage in CEO compensation in Indian private sector firms is associated with a firm’s operating efficiency and asset productivity. It documents that firms with lower operating efficiency and asset productivity use more RPE by placing a more negative weight on their peer’s performance. Further, this study documents that more RPE usage is associated with lower asset productivity in both business group-affiliated firms as well as independent firms. In contrast, more RPE usage is associated with lower operating efficiency only in independent firms. This indicates that a firm’s ownership structure too plays a role in the RPE usage in Indian private sector firms.

Business Groups and Tunneling: Evidence from Corporate Charitable Contributions by Korean Companies

This paper investigates whether corporate philanthropic decisions are associated with a firm’s listing status and business group affiliation. Analyzing a large sample of public and private firms in Korea, we find that (1) public firms make more charitable contributions than private firms and (2) business group-affiliated firms make more charitable contributions than non-affiliated firms. The results suggest that public firms, owing to greater public scrutiny, and business groups, owing to higher political costs, are encouraged to make more corporate charitable contributions. Further, we find that (3) the greater corporate giving by public firms than private firms is more pronounced for business group-affiliated firms, compared with non-affiliated firms. The result is consistent with business groups’ strategic coordination of their affiliates’ philanthropic decisions to maximize the value of the business group as a whole or to tunnel business group resources out to controlling shareholders who hold a larger portion of private affiliates than public affiliates.

"Business Group, Corporate Entrepreneurship and Internationalization: Evidence from India"

Fine-grained research on business group will open up the black-box of performance implication of business group affiliation. This will address the puzzle of superior performance of business group affiliated firms in spite of disappearance of institutional voids in emerging economy. In this paper, we argue that despite some potential advantages, business group affiliation suppresses corporate entrepreneurship of firms. Taking a contingency perspective, we offer ‘degree of internalization’ as one way firms are able to offset the detrimental effects of business group affiliation and strengthen their corporate entrepreneurship. We also argue that internationalization directly enhances corporate entrepreneurship of firms. We find support for our predictions in a novel longitudinal data set of 604 Indian firms for four-year period (2010-2013). Our findings provide guidance to managers of business group on how they can improve upon their corporate entrepreneurship efforts through internationalization. This compl...

Corporate Bankruptcy, Soft Budget Constraints, and Business Group Affiliation: Evidence from Indian Firms

We examine the ex-ante performance of 1185 firms that filed for bankruptcy between 1992 and 2009. Evidence suggests that firm specific poor operating performance and industry wide distress are the principal causes (contributing 42% each for cash flow shortfall) of corporate distress. We observe vitiating investment, operating, and financing performance of the sample firms starting from four years prior to their bankruptcy. Further, we report less severe decline in capital expenditure in the case of state controlled firms and business group affiliated firms, indicating the presence of "soft budget constraints" among the sample firms. Logistic regression, estimating firm level distress probabilities offer indirect evidence for "risk sharing argument" among business group affiliates.

Dueling Institutional Logics And The Effect On Strategic Entrepreneurship In Chinese Business Groups

Focusing on a period of institutional friction when institutions are in transition, this study examines the dueling institutional logics that simultaneously operated as business groups were implemented to foster strategic entrepreneurship activities in China. Our findings from 1,095 Chinese business group-affiliated firms show that the original institutional logic of state control and ownership remains a potent factor, while the new institutional logic in support of strategic entrepreneurship takes place through business groups' informal and formal organization controls. Further, the state logic causes rigidity and inflexibility for firms to react to the new institutional demands, thus weakening the positive effects of business group formal and informal controls on strategic entrepreneurship. This study contributes to the institution-based view by highlighting that dueling logics coexist in business groups and investigating how they can be sources of variation in advancing strategic entrepreneurship during periods of institutional friction. Copyright © 2014 Strategic Management Society.

Do Foreign Investments Benefit Business Group Affiliated Firms? Empirical Evidence from India

Business groups are the prevalent governance form in emerging markets. Since diversified business groups frequently act as a substitute for missing institutions in less developed countries, a general consensus among institutional economists exists that group affiliation is beneficial to firms in the home market. It is yet unclear, however, whether firms can translate benefits derived from group membership to the international context. This research investigates whether or not it is advantageous for multinational enterprises to be part of a business group. Specifically, this study examines globalization strategies of group affiliated firms such as their mode of entry selection and their foreign location choice. Using hierarchical linear modeling on a sample of 197 Indian firms which are part of 96 business groups, we find that business group membership is generally harmful to multinational activity. However, if increasing globalization and market liberalization was to drive affiliated firms into international marketplaces, then they should at best invest in developed markets via partially-owned establishments.

Revisiting the Firm Ownership and Performance Debate in an Emerging Economy during Economic Reforms

Neoliberal scholars have attributed the inefficiency of state owned enterprises (SOEs) on ineffective monitoring arrangements in weak institutional environments and predicted their ultimate demise. But continued and significant presence of SOEs in emerging economies like India, even after two decades of economic reforms has provoked us to revisit the ownership performance debate. We study the effect of ownership and reforms on the performance of the entire population of firms in India over a twenty year period. Since, India has significant presence of business group affiliated firms and subsidiaries of MNCs and business groups tend to create internal markets and MNCs resort to internalization to compensate for the weak institutional environment, we have adopted finer grained classification of privately owned firms. We find that the state owned enterprises have not only turned around but have been outperforming firms from other ownership categories on certain parameters. We argue that firms in an emerging economy like India do not suffer from a lack of monitoring arrangements because of the so called ‘weak institutional environment’. It is likely that the institutions that are more relevant and influential in this context are rooted in the social structures, and perhaps not so much the traditional legal and economic institutions prevalent in developed economies. Hence the reform process has merely helped in opening up more opportunities for some categories of firms, thereby impacting performance.

Problematic search, slack search and institutional logic in corporate R&D strategy: An empirical analysis of Taiwanese electronics firms

AbstractThis study focuses on firms’ search behavior with regard to corporate R&D investment. Building on Cyert and March's (1963) behavioral theory of the firm, we develop specific hypotheses about how firms adjust their R&D investment in response to performance discrepancies, and how this adjustment varies for two types of slack resources. Moreover, by utilizing institutional logic, we also hypothesized that the firms’ search behaviors in response to performance feedback may differ between business-group affiliated and unaffiliated firms. Empirical evidence from panel data coving 274 Taiwanese electronics firms listed on the Taiwan Stock Exchange over the period 1999–2008 is consistent with our theoretical predictions. In particular, we find that firms will increase R&D investment when they faced discrepancies in performance, but will decrease R&D spending when close to bankruptcy. Moreover, our results show that unabsorbed and absorbed slack have different impacts, positively and negatively affecting R&D investment, respectively. In addition, we find that both business group-affiliated and unaffiliated firms will increase R&D investment in response to negative performance feedback, but only business group-affiliated firms will increase R&D activity when facing positive performance feedback. Furthermore, we also find that only business group-affiliated firms have a greater inclination to invest in R&D when there is unabsorbed slack. Our findings extend the claims of behavioral theory in newly industrialized economies, and identify the important factors that need to be considered in future studies.

When do Family Members Join Boards? Legitimacy-Building Strategies for Family Members

As a departure from previous literature that has focused on the consequences of family management, this study turns our attention to its antecedents. This study extends our understanding of when family members join boards of directors by focusing on the legitimating aspects of board membership. According to the findings, family members are appointed to boards of high-performing and high-reputation firms in an effort to build the legitimacy of family leadership. Furthermore, organizational efforts to legitimize leadership are focused on family members who are most in need of legitimacy: family members beyond the second generation. Evidence in support of these mechanisms is found using panel data of business group affiliated firms in South Korea.

An Epitaph for Crony Capitalism? Business group affiliation, capital structure and liberalization

Before financial deregulations in developing economies business group affiliated firms enjoyed preferential access to capital from state controlled financial systems. It was anticipated that instit...

The Effects of Business Group Characteristics on FirmCash Holdings: Evidence from Taiwan

 Abstract—This paper tests the relationship between business group characteristics and corporate cash holdings for business group-affiliated firms listed on the Taiwan Stock Exchange and in the Over-The-Counter market from 2000 to 2009. Specifically, this paper employs group affiliation, group diversification, group ownership holdings, and group listed numbers as business group characteristic variables. The empirical results reveal that group-affiliated firms hold more cash than non-affiliated firms. Besides, the results show that more highly-diversified groups, groups with more stock ownership holdings, and groups with fewer listed firms hold lower cash balances. Business groups play a prominent role in economic development in Taiwan. According to the investigative report on business groups in Taiwan provided by China Credit Information Service (CCIS), Ltd., the employment of the top 100 business groups accounted for about 11% of the Taiwanese employed population in 2009. Compared with their stand-alone counterparts, business group-affiliated firms are more likely to acquire financial capital from an efficient business environment because the business groups act as a social network that offers benefits to their affiliates and resolve the problems that arise from the imperfections in the emerging markets (1). Nevertheless, Yeh and Woidtke (2) indicate that business groups in Taiwan are characterized by their relatively weak protection of minority shareholders. Kusnadi (3) shows that those managers in firms with a pyramidal group ownership structure are inclined to accumulate cash balances, and the presence of a pyramidal ownership structure in firms could lead to an entrenchment effect and therefore an increase in agency costs. Previous studies on business groups have analyzed the relationship between business group affiliation and group- affiliated firms' performance, innovation, and leverage policies (4), (5), (6), (7). However, little attention has been directed to addressing business group characteristic effects on the cash holding decisions of group-affiliated firms. Corporate cash holdings play an important role in a firm's assets and operating activities. Firms' cash holdings have received much attention from corporate managers, investors,

Business groups and corporate transparency in emerging markets: Empirical evidence from India

This study examines the difference in corporate transparency of firms affiliated with business groups and unaffiliated firms in India. Based on previous studies we measured corporate transparency using equity analysts’ forecast error and dispersion. We find that firms affiliated with business groups are less transparent than unaffiliated firms. Lack of transparency leads to higher analyst forecast error and dispersion. This study also finds that business group-affiliated firms with more intra-group capital transactions have higher forecast error and dispersion. The findings of this study suggest that firms affiliated with business groups are less transparent due to their reliance on internal capital markets, and therefore lack incentives to disclose information to market participants. As a result, the information asymmetry between business groups and the capital market is higher, restricting the activities of information intermediaries such as equity analysts, who play an important role in the external capital market.

Relationship between management ownership and firm value among the business group affiliated firms in Korea

In this paper, we revisit an old issue on the relation between management ownership and firm’s value. The Korean panel data on the business group firms, allows us to compute ownership right and control right separately for each business group affiliated firm. Our measures are different from the similar measures on the Korean firms as in Baek et al. (2004) or Joh (2003). Rather than confounding the two offsetting effects, this paper tests convergence of interest hypothesis and entrenchment hypothesis separately. Empirical findings show that, given control right, there is no clear-cut relation between firm value and the inside management ownership for most firms with the inside management ownership less than 42%, that there is a positive relation between firm value and the inside management ownership for those firms with the inside management ownership higher than 42%, and that, given ownership right, profitability decreases as control right increases.

Do Busy Boards Add Value to Standalone Firms Relative to Business Groups? Evidence from India

We investigate whether busy boards add more value to standalone firms compared to business group affiliated firms in India – an economy plagued with significant institutional voids. Using board composition data of the top 500 Indian firms spanning the period 2003 to 2006, we find that firm performance improves when its board changes from being a board with non-busy outside directors to a board with busy outside directors. Furthermore, directors’ qualifications and experience determine their directorships and degree of busyness. We also find that firms affiliated with business groups exhibit a negative relationship to the number of busy outside directors.

Role of Private Equity Exit Strategy, Governance Mechanism and Regulatory Constraint on Performance of Indian IPOs

The performance of Indian initial public offerings (IPO) is influenced by the ownership structure of a firm. As many firms raise the capital in the form of private equity (PE), this work highlights the impact of governance structure of private equity firms, the decision of exit through IPO route on the performance of Indian IPO. In Indian scenario, private equity (PE) backed IPO shows insignificant role in impacting the degree of underpricing of IPO as well as IPO performance. The insignificant ownership stake held by private equity investors as a consequence of regulatory constraint as well as liquidating less ownership stake through IPO is identified as a differentiating characteristic in India. These observed results are contrary to the results reported by Lee & Wahal (2004). On the other hand it supports the grandstanding hypothesis related to private equity firms put forth by Gompers (1996). However, our results show that PE investment in business group affiliated firms’ shows significant negative impact on its long term performance. The overall performance of IPO follows ‘U’ shape curve.

The Effectiveness of the Insider-Trading Sanctions

T HIS study empirically examines the effects of increases in the level and enforcement of insider-trading regulations in the 1980s on corporate insiders.1 The main goal of the insider-trading regulations is to prevent insiders from trading on the basis of material, nonpublic corporate information. In addition, regulations require that insiders report their transactions to the Securities and Exchange Commission (SEC) and refrain from generating short-term profits by trading in their own firms' stocks. Regulations also prohibit insiders from short selling the securities of their firms.