Propping in Business Groups: Prediction Efficacy of Earnings Announcements
27 Jun 2019-Global Business Review (SAGE PublicationsSage India: New Delhi, India)-Vol. 20, Iss: 4, pp 981-995
TL;DR: In this paper, the authors examine evidences of propping in business groups in India and adopts the event study method to ascertain the price reaction to the earni... and the article is an empirical study which adopts a
Abstract: This study examines the evidences of propping in business groups in India. The article is an empirical study which adopts the event study method to ascertain the price reaction to the earni...
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TL;DR: In this paper, the authors use data on ownership structures of large corporations in 27 wealthy economies to identify the ultimate controlling shareholders of these firms, and they find that, except in economies with very good shareholder protection, relatively few firms are widely held, in contrast to Berle and Means's image of ownership of the modern corporation.
Abstract: We use data on ownership structures of large corporations in 27 wealthy economies to identify the ultimate controlling shareholders of these firms. We find that, except in economies with very good shareholder protection, relatively few of these firms are widely held, in contrast to Berle and Means’s image of ownership of the modern corporation. Rather, these firms are typically controlled by families or the State. Equity control by financial institutions is far less common. The controlling shareholders typically have power over firms significantly in excess of their cash f low rights, primarily through the use of pyramids and participation in management.
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"Propping in Business Groups: Predic..." refers background in this paper
...The group structure may also enable efficient allocation of resources (Khanna & Palepu, 1997, 2000; Stein, 1997)....
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TL;DR: In this paper, the authors examine the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market and examine the process by which internal capital markets channel limited resources to different uses inside a company.
Abstract: This article examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market Unlike a bank, headquarters has control rights that enable it to engage in "winner-picking"-the practice of actively shifting funds from one project to another By doing a good job in the winner-picking dimension, headquarters can create value even when it cannot help at all to relax overall firm-wide credit constraints The model implies that internal capital markets may sometimes function more efficiently when headquarters oversees a small and focused set of projects THIS ARTICLE ANALYZES THE process by which internal capital markets channel limited resources to different uses inside a company In so doing, it seeks to address two related sets of questions First, what is the fundamental economic rationale for creating an internal capital market? That is, under what circumstances can it make sense to combine several technologically distinct projects under one roof, and have them seek funding from corporate headquarters, as opposed to setting them up as stand-alone companies that each raise external financing on their own? Second, given this rationale, what is the optimal size and scope of an internal capital market? Should headquarters be involved in funding a large number of projects, or just a few? And should these projects be unrelated to one another, or in similar lines of business? The answers to both sets of questions flow from the insight that in a credit-constrained setting-where not all positive NPV projects can be financed headquarters can create value by actively reallocating scarce funds across projects For example, the cash flow generated by one division's activities may be taken and spent on investment in another division, where the returns are higher Or alternatively, one division's assets may be used as collateral to raise financing that is then diverted to the other division Simply put, individual projects must compete for the scarce funds, and headquarters' job is to pick the winners and losers in this competition
1,853 citations
"Propping in Business Groups: Predic..." refers background in this paper
...The group structure may also enable efficient allocation of resources (Khanna & Palepu, 1997, 2000; Stein, 1997)....
[...]
TL;DR: In this paper, the authors analyzed the performance of the affiliates of diversified Indian business groups relative to unaffiliated firms and found that the most diversified business groups outperform the other firms.
Abstract: Emerging markets like India have poorly functioning institutions, leading to severe agency and information problems. Business groups in these markets have the potential both to offer benefits to member firms, and to destroy value. We analyze the performance of affiliates of diversified Indian business groups relative to unaffiliated firms. We find that accounting and stock market measures of firm performance initially decline with group diversification and subsequently increase once group diversification exceeds a certain level. Unlike U.S. conglomerates' lines of business, and similar to the affiliates of U.S. LBO associations, affiliates of the most diversified business groups outperform unaffiliated firms.
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TL;DR: In this article, the authors proposed a general methodology to measure the extent of tunneling activities in Indian business groups, based on isolating and then testing the distinctive implications of the tunneling hypothesis for the propagation of earnings shocks across e rms within a group.
Abstract: Owners of business groups are often accused of expropriating minority shareholders by tunneling resources from e rms where they have low cash e ow rights to e rms where they have high cash e ow rights. In this paper we propose a general methodology to measure the extent of tunneling activities. The methodology rests on isolating and then testing the distinctive implications of the tunneling hypothesis for the propagation of earnings shocks across e rms within a group. When we apply our methodology to data on Indian business groups, we e nd a signie cant amount of tunneling, much of it occurring via nonoperating components of proe t. I. INTRODUCTION Weak corporate law and lax enforcement mechanisms raise fears of expropriation for minority shareholders around the world. These fears seem especially warranted in the presence of business groups, a common organizational form in many developed and developing countries. In a business group, a single shareholder (or a family) completely controls several independently traded e rms and yet has signie cant cash e ow rights in only a few of them. 1 This discrepancy in cash e ow rights between the different e rms he controls creates strong incentives to expropriate. The controlling shareholder will want to transfer, or tunnel, proe ts across e rms, moving them from e rms where he has
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