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Financial decisions by business groups in India: Is it “fair and square”?

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  • Basu, Debarati
  • Sen, Kaustav

Abstract

Using a large sample of business-group-affiliated firms in India, we investigate whether corporate financial decisions that create internal capital markets are influenced by the extent of insider ownership. We hypothesize that insiders want to control more capital, motivated either by opportunism or efficiency. We distinguish opportunism from efficiency based on whether sales decrease or increase in the year after financial decisions are taken. We find that as insider ownership increases, a firm (i) transfers less capital into the group when sales increase in the following year, (ii) pays out less dividends when sales decrease in the following year and (iii) receives less capital from the group if it is struggling. This indicates that insiders act in an efficient manner when transferring capital across firms within the group. However, when deciding whether to return capital to investors, they retain resources even when future performance does not improve and thus act opportunistically.

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  • Basu, Debarati & Sen, Kaustav, 2015. "Financial decisions by business groups in India: Is it “fair and square”?," Journal of Contemporary Accounting and Economics, Elsevier, vol. 11(2), pages 121-137.
    • Handle: RePEc:eee:jocaae:v:11:y:2015:i:2:p:121-137
    DOI: 10.1016/j.jcae.2015.02.001
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    2. Jaiswall, Sudhir Shiv Kumar & Bhattacharyya, Asish Kumar, 2016. "Corporate governance and CEO compensation in Indian firms," Journal of Contemporary Accounting and Economics, Elsevier, vol. 12(2), pages 159-175.
    3. Dayanandan, Ajit & Donker, Han & Kuntluru, Sudershan & Nofsinger, John, 2020. "Share buybacks in India," Research in International Business and Finance, Elsevier, vol. 54(C).
    4. Chada, Swechha & Saravanan, Palanisamy & Varadharajan, Gopal, 2024. "Socioemotional wealth and cash flow sensitivity of cash: Evidence from India," The North American Journal of Economics and Finance, Elsevier, vol. 69(PA).
    5. Basu, Debarati & Sen, Kaustav, 2022. "Organizational form and access to capital: The role of regulatory interventions," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(3).
    6. Chauhan, Yogesh & Kumar, Satish, 2017. "Does founder ownership affect foreign investments? Evidence from India," Emerging Markets Review, Elsevier, vol. 32(C), pages 116-129.

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    More about this item

    Keywords

    Internal capital markets; Opportunism vs. efficiency; Business groups; Dividends; Cash flow rights;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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