PERFORMANCE EFFECTS OF BG AFFILIATION: ROLE OF INSTITUTIONAL CHANGE AND SELECTIVE INTERVENTION

We extend the research on the effects of affiliation to business groups (BGs) by examining the impact of evolving external environment and internal structural/governance actions. We argue that improvement in the institutional environment in emerging economies reduces the value adding potential of BGs, leading to an increasingly negative impact of BG affiliation on the performance of individual firms. We also propose that structural actions can partly mitigate the costs associated with BG affiliation. Specifically, we argue that public listing of a BG firm is a form of selective intervention that infuses elements of market control in a hierarchy, thus improving monitoring and performance incentives, and will positively moderate the relationship between BG affiliation and performance. We examine evidence in an unbalanced panel dataset of 10453 BG and non-BG firms from India during the post-liberalization period of 1994–2009 and find support for our arguments.