Business Group Affiliation Research Articles

Information and Communication Technology Adoption Strategies of Emerging Multinationals From India

The growth and rising prominence of multinationals from emerging markets (eMNCs) mark a significant phase in the evolution of the world economy in the last decade. This study investigates the effect of eMNCs' institutional embeddedness in terms of age on the adoption strategy of new and emerging information and communication technologies (ICT). Using panel multiple regression on a unique database of 3,756 observations from 394 Indian eMNCs in period of 2009 to 2019, the authors find that firm age has a unique negative impact on ICT investments of eMNCs. However, ownership is able to influence the negative impact of age in unique ways. Business group affiliation attenuates the impact of firm age on ICT investments, such that the reduction in ICT investments with firm age is less for BG-affiliated firms. Meanwhile, the higher the foreign institutional ownership in eMNCs, the lower the impact of firm age on ICT investments.

Business group affiliation in rural contexts: Do small firms grow faster through working capital management?

AbstractThis paper investigates whether small firms affiliated with business groups that operate in rural regions grow faster through conservative working capital management. Conservative working capital management refers to granting long payment delays to customers and holding high levels of inventories to prevent stockouts. Small firms affiliated with business groups have access to the groups’ internal capital markets to finance conservative working capital management. They can therefore provide liquidity to their customers in rural regions where access to banking debt is more difficult compared to that in urban territories. Using a firm random effects model on a large panel of French small firms operating in the trade industry, we report that business group affiliation positively moderates the positive effect of working capital management on firms’ growth in rural contexts. Our results challenge a commonly held view that states that small firms grow faster as “light” organizations as we present evidence that growth is also achieved by firms holding larger inventories and granting more trade credit to their customers, at least in the French context.

Auditor tenure and audit quality: an investigation of moderating factors prior to the commencement of mandatory rotations in India

PurposeThe Indian Companies Act 2013 mandated auditor rotations in the financial year 2018–2019. Similar regulations are being considered in many countries, based on the assumption that longer tenure is detrimental to audit quality; yet, the evidence from investigations of this assumption is inconclusive. This paper aims to examine the effect of moderating factors on the relation between audit quality and audit tenure, given the regulatory trend and the lack of consensus in extant literature.Design/methodology/approachThis paper examines the relationship between audit quality and audit tenure among Indian firms from 2001 to 2015 and tests for moderating factors including auditor compensation, business group affiliation and chief executive officer (CEO) duality.FindingsContrary to the objective of mandatory rotations, this study finds that longer auditor tenure generally enhanced audit quality among Indian firms prior to mandatory rotations. However, for companies paying abnormally high compensation to auditors, this paper finds that longer tenure decreases audit quality, particularly if the firm is affiliated with a business group or firms where the CEO also serves as the board chair. Thus, the potential benefits of mandated shorter tenure appear to be confined to high-fee paying companies with a business group affiliation and/or a dual-role CEO.Originality/valueThis study is one of the first to examine conditioning factors that affect the relationship between audit quality and auditor tenure. Results suggest that regulations limiting auditor tenure would be beneficial only to the shareholders of a narrow group of firms; while for the majority of firms, limiting auditor tenure may actually be counter-productive.

In the Same Boat Towards Social Impact: Business Group Affiliates’ CSR

Business groups (BGs) are fundamental drivers of economic activity and growth in many countries. However, research on the financial performance of groups and affiliates dominates the field. The socio-environmental impact of BGs, beyond externalities of their financial performance and economic impact, has widely been overlooked. This paper contributes by considering the impact of BG affiliation on one form of affiliates’ non-financial performance; specifically on corporate social responsibility (CSR). We argue that a firm’s BG affiliation increases member firms’ engagement in behaviors and strategies that potentially lead to improved socio-environmental impact through a social embeddedness mechanism. Central to this mechanism are the links between the collective, i.e. group-level of a BG, and the individual affiliates’ goals and behavior. Individual firms within a BG may have their behaviors shaped by different pressures and incentives – leading to variation in compliance and shirking depending on the level of affiliation. This effect is expected to fade the more peripheral the focal organization is within the BG in a structural sense. However, once the BG network transcends national borders, the effect of being too decoupled form the BG network might again incentivize more CSR from a focal affiliate. We test our hypotheses drawing on a unique dataset of approximately 7,000 firms across 46 countries over 10 years. Owing to the comprehensive nature of our dataset, we also control for country-level institutions beyond company-level financial aspects.

Business Group Affiliation and the Risk of PAE Litigation

Using novel data on US public firms, this paper investigates the preferences of patent assertion entities (PAEs) to choose target companies. Drawing upon signaling theory, we argue that business group affiliation can be interpreted by PAEs as an informative attribute about the superior value creation capabilities of affiliated firms (compared to standalones). PAEs, as rent-seekers, could leverage this information to identify opportunities to extract rents. Consistent with our argument, we find that PAEs tend to sue more to companies having business affiliations than companies without such affiliations. However, business groups differ from one another in a range of observable attributes, generating differing opportunities from rent extractions. We also examine the role of three business group characteristics in conveying information to PAEs. The results show that the bigger the business group, the more attractive to PAEs. Likewise, the higher the technological overlap, the greater the probability of being sued. Our results also reveal that the organizational distance is not a key driver.

Strategic Asset-Seeking During in a Cross Border Acquisition Wave

Cross border acquisition (CBA) waves are periods of concentrated acquisition activity characterized by a cyclical pattern. These waves are triggered by exogenous shocks and provide a time bound window for firms to respond either by seeking newer markets or by upgrading themselves by acquiring strategic assets. We draw on the extant literature that emphasizes the challenges faced by emerging markets firms in pursuing cross border acquisitions. Our findings suggest a U-shaped relationship between entry timing within a wave and strategic asset-seeking acquisitions, which is driven by a trade-off between acquisition of high quality assets and reduction in uncertainty surrounding the acquisition deal. Further, acquirer’s ownership structure conditions the relationship between entry timing and acquisition motives. Specifically, business group affiliation and foreign institutional ownership strengthen the relationship between timing within a CBA wave and strategic asset-seeking motive. Our findings, based on a sample of Indian acquirers provide robust support to our theoretical arguments.

Strategic Response to Corporate Governance Reform of Family Business Groups

Based on the scheme of principal–principal conflicts, we investigate family business groups’ strategic response to a board regulation requiring appointment of independent directors and the effects of proactive compliance with this regulation on performance. Empirical results from Taiwan show that family-controlled business groups are less likely to adopt proactive compliance. Controlling shareholders’ excess control has a negative effect on a firm’s adoption of proactive compliance; foreign ownership has a positive effect. The family business group affiliation weakens the positive effect of foreign ownership on the adoption of proactive compliance. We also found that improved firm performance is directly and positively affected by the proactive response. Thus, this study concludes that the responsiveness of firms to institutional pressures depends on which control mechanisms they are situated in and the power relations within the key stakeholders.

Local versus foreign analysts' forecast accuracy: does herding matter?

The aim of this paper is to compare the information and resource endowments possessed by different analyst types, classified by both location and employment within the context of seven emerging Asian markets. Our results show that local analysts are more accurate than expatriate and global analysts when we consider all earnings forecasts. However, when we control for the segregated herding behaviour of analysts, we find that herding local forecasts are one of the least accurate compared to other herding forecasts. By contrast, bold local (that is, non‐herding local) forecasts are more accurate than all other bold forecasts. This suggests that the information endowment of bold local analysts is superior to the information and resource endowments of bold expatriate analysts. We show that the superior accuracy of bold local forecasts does not stem from business group affiliations, investment banking relationships, demand for local analysts’ services or the specialisation of analysts vis‐à‐vis countries or sectors. We consistently find that bold local analysts are better at assessing the earnings of the firm they forecast. Our results show that the prior documented advantage of local analysts in terms of forecasting accuracy is driven by the bold local analysts, with herding locals diluting this effect. To the best of our knowledge, this is the first study to explore the segregated herding behaviour of local, expatriate and global analysts, and its impact on relative forecast accuracy across analyst types.

THE INFLUENCE OF GROUP AFFILIATION ON IPOS PERFORMANCE: AN EMPIRICAL ANALYSIS OF INDIAN IPOS

Securities and Exchange Board of India (SEBI) keeps on improving the securities market regulations to improve investors' protection. To revive the primary market, in 2009, SEBI ICDR (Issue of Capital and Disclosure Requirements) Regulations, 2009 was amended with revised guidelines. The advantage of group affiliation and reputation on IPO performance differs with time and varied business groups. Grouped IPOs evidenced mixed outcomes based on theories developed under tunnelling, propping, network and certification hypothesis. We examine how the business group affiliation impact the underpricing, liquidity and volatility performance of IPOs. Using database of 259 IPOs issued in Indian market from 2009 to 2019, we find less underpricing, liquidity and volatility for group affiliated IPOs. The present study supports certification, network and propping hypothesis. We find underpricing extent is reduced than earlier period, average security return 12 percent while underpricing 11.79 percent is evidenced. Liquidity and volatility reported a declining trend from listing day to 1-month post listing.

Persistence of past: Impact of historical institutions on corporate risk taking

Using the context of institutional transitions in the emerging economy context of India, we examine the influence of a firm's historical economic policies on its corporate risk-taking. We propose that protectionist and constraining economic policies of the socialist regime inscribe ‘risk-avoidance’ routines on incumbent firms, which continue to persist. Utilizing the data of the Indian economic environment (1956–1991) and analyzing a large sample of Indian firms during 1994–2007, we hypothesize and find the support that level of protectionist imprinting negatively impacts corporate risk-taking in the post-liberalization era. This effect is weakened by the moderating impact of the business group affiliation.

Corporate social responsibility, business group affiliation and shareholder wealth: evidence from an emerging market

PurposeThis paper aims to examine the relationship between corporate social responsibility (CSR) and shareholder wealth arising from announcement returns of security issuance from a frontier market. It also explores the role of business group affiliation (BGA) on this relationship.Design/methodology/approachThe study uses short-term scenarios to examine the link between CSR and shareholder wealth using the event study methodology which helps us mitigate the reverse causality problems related to studies of the relationship between CSR and firm value. Abnormal returns surrounding the security issue announcements were generated using the market model.FindingsThis paper finds that security issuers with high CSR scores are associated with higher shareholder value. However, this paper finds that CSR activities of security issuers with BGA are value-destroying which is consistent with the agency perspective of CSR.Research limitations/implicationsThis study is limited to only one nascent market, namely the Colombo Stock Exchange.Originality/valueThis study documents that CSR and BGA are important determinants, among others, of stock price reactions to security offerings in emerging markets.

Crisis, firm characteristics and stock performance: evidence from Hospitality and Tourism sector

ABSTRACT This study investigates the critical firm-level strengths and weaknesses that explain cross-sectional variations in abnormal stock returns of Hospitality and Tourism (HT) firms during different phases of a crisis. We used the event study and multivariate regression framework for analysing the Indian HT firms’ data around the COVID-19 crisis. While reporting a significant negative influence of COVID-19, we identified the early crisis, market crash and continuation of the crisis periods. Furthermore, we observe that during the early-crisis period, business diversity, financial stability and board diversity improved HT firms’ strength to withstand the risk, while business group affiliation was of little help. During the market crash and continuation of the crisis phase, better capital intensity and financial stability proved helpful. The managers of HT firms can take cues from this study to understand firm-level characteristics that provide resilience to their firms’ value in managing different phases of the crisis.

Do internationalizing business group affiliates perform better after promarket reforms? Evidence from Korean SMEs

This study examines how business group affiliation moderates the performance (P) consequences of internationalization (I) by firms from advanced emerging economies that have implemented major promarket reforms. Our theoretical framework integrates institutional and network perspectives with internationalization research to investigate the effects of institutional change on the role of business groups in supporting the internationalization of their affiliates. Using a dataset of 143 publicly listed Korean manufacturing SMEs over a five-year period, our findings provide statistical evidence that business group affiliation has different moderating effects on the I-P relationship according to the degree of internationalization. Specifically, group-affiliated SMEs exhibit a U-shaped I-P relationship while non-affiliated, independent SMEs present an overall downward S-shaped relationship, where group-affiliated SMEs perform better at any level of internationalization. Besides, we also examine the moderating effect of industry characteristics and found that in the case of SMEs in technology-intensive industries, affiliation to a business group enhances firm performance at low and intermediate levels of internationalization. Overall, we conclude that business groups are able to provide benefits to their internationalizing affiliates in an improved institutional context.

PARTNERS AND GEOGRAPHICAL SCALE OF SMES’ OPEN INNOVATION: DOES BUSINESS GROUP AFFILIATION MATTER?

Small businesses face multiple constraints on innovating that open innovation (OI) has potential to help overcome. The aim of this study is to examine the association between business group affiliation and the extent of OI engaged in by SMEs. Unlike independent SMEs, those that have affiliations might benefit from internal and also external networks to initiate partnerships to innovate. We analysed data collected from 711 French SMEs that engage in innovation to assess the association between business group affiliation and open innovation practices. We found that business group affiliation has no significant relationship with the degree of engagement in open innovation or with partnership openness. Nevertheless, we found that affiliation to an international group influences the geographical openness of SMEs’ innovation. These findings contribute to our understanding of open innovation among SMEs by acknowledging the geographical challenges of partnerships in open innovation.

Chinese MNE acquisition of unrelated foreign businesses: The role of diversified business group affiliation, private ownership and strategic asset seeking

While the acquisition by Chinese firms of unrelated foreign businesses has become quite common, it is a highly risky undertaking not fully explained by international business scholars. Using resource-based and institutional theory, we hypothesize that affiliation with a domestically diversified business group confers pre- and post-acquisition advantages and legitimacy, fostering unrelated foreign acquisitions. In addition, we argue that private ownership as well as a motive to seek strategic assets amplify this tendency among Chinese firms affiliated to diversified groups. Ordered logit modelling for 662 Chinese cross-border M&As over a 10-year period provides support for our hypotheses. Our findings shed new light on: the distinctive characteristics of Chinese MNEs; broader conceptual arguments regarding the strategy of emerging market MNEs; the apparent paradox of why Chinese MNEs have used international acquisitions to diversify at a time when many Western diversified conglomerates are divesting non-core businesses.

The Impact of Financial Distress on Cash Holdings in Indonesia: Does Business Group Affiliation Matter?

The Impact of Financial Distress on Cash Holdings in Indonesia: Does Business Group Affiliation Matter?

Corporate governance dynamics of political tie formation in emerging economies: Business group affiliation, family ownership, and institutional transition

AbstractResearch Question/IssueDespite the importance of political ties to firm strategy and performance, little is known about why and how firms form political ties. This study examines how firm‐specific governance structures function as important determinants of the formation of political ties and how the impact of governance structures evolves during institutional transition of emerging economies.Research Findings/InsightsOur empirical analysis is based on a longitudinal data set involving manually coded political ties of listed firms in Taiwan between 1996 and 2005. We find that business group affiliation and family ownership facilitate the formation of political ties but that such effects diminish as market infrastructures and regulatory institutions develop.Theoretical/Academic ImplicationsThis study systematically examines how corporate governance structures affect the formation of political ties. It identifies an overlooked explanation for the dynamics of political ties that resides in the internal governance structures of firms. It contributes to the corporate governance research by demonstrating how governance structures other than the board of directors can provide resources to facilitate strategic actions such as political tie establishment. It also enriches research on corporate governance bundles by showing the interdependence among multilevel governance mechanisms in the context of political tie formation.Practitioner/Policy ImplicationsThis study offers insights for business executives interested in managing interdependence with government. While business group affiliates and family firms are better able to link to politicians, such advantages diminish during institutional transition. Hence, group leaders and family owners should consider other political activities to effectively manage political risks as institutions develop.

Heterogeneity of R&D in family firms

Drawing on the loss aversion framework, this research posits that the risk behaviors of family business group (FBG) affiliates are more positive than those of family standalones. Empirical results, using the case of Taiwan, confirm that the use of R&D by these affiliates is greater than that by family standalones. Further analysis, however, indicates that this greater positive effect of FBG affiliates than of family standalones is attenuated if the managerial power exercised by controlling shareholders is greater than the power driven by legal ownership. By demonstrating the heterogeneity of risk behaviors within family firms, our research adds value to the existing literature by focusing on the differences between family and nonfamily firms.

Business Group-Affiliation and Corporate Social Responsibility: Evidence from Listed Companies in China

Business groups have played a vital role in the development of emerging markets. However, we share very limited understanding in the role of business group that act on affiliated firms’ CSR performance. Using manually sorted data on A-share listed companies and business groups in China from 2010–2017, we examine whether a company’s business group-affiliation affects its corporate social responsibility (CSR) performance and the mediating mechanisms of this association. Our empirical models show that group companies bear a higher level of social responsibility compared to independent companies. This positive relationship between group-affiliation and social responsibility relies on resource allocation through internal capital markets, rent-seeking initiatives, and consideration of corporate reputation. Moreover, group affiliation benefits the firm’s CSR performance in employee’s responsibilities, consumers’ responsibilities and environmental responsibilities, while significantly lower the shareholders’ responsibilities. Our empirical valuation of group companies’ CSR levels can serve as a benchmark for emerging market companies implementing social responsibility policies.

Are There Limits to Diversification in Emerging Economies? Distinguishing between Firm‐Level and Business Group Strategies

AbstractThe viability of unrelated diversification as a strategy in emerging economies is an unresolved puzzle. Because business groups dominate the landscape in these economies, and are known to diversify either by expanding the scope of existing affiliate firms and/or setting up new firms, we argue that it is important to make a distinction between firm‐level and business group‐level diversification. The results of our study covering the 15‐year period following India’s economic liberalization confirm our thesis. Whereas all firms, including business group affiliates, reduced unrelated scope to negotiate product and capital market pressures, business groups took advantage of the opportunity‐rich, post‐reform environment to enter into new unrelated businesses by setting up new affiliates. Our findings echo suggestions that as institutions strengthen, the locus of unrelated diversification moves away from managers of public corporations to entities with different types of ownership structures. We present the business group as one such ownership structure.