Financial Decisions by Business Groups in India: Is It ‘Fair and Square’?

Basu, D., & Sen, K. (2015). Financial decisions by business groups in India: Is it “fair and square”?. Journal of Contemporary Accounting & Economics, 11(2), 121-137.

Posted: 11 Feb 2020

See all articles by Debarati Basu

Debarati Basu

XLRI - Xavier School of Management

Kaustav Sen

Pace University - Lubin School of Business

Date Written: February 24, 2015

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.

Keywords: Internal capital markets, Opportunism vs. efficiency, Business groups, Dividends, Cash flow rights

JEL Classification: G15, G34

Suggested Citation

Basu, Debarati and Sen, Kaustav, Financial Decisions by Business Groups in India: Is It ‘Fair and Square’? (February 24, 2015). Basu, D., & Sen, K. (2015). Financial decisions by business groups in India: Is it “fair and square”?. Journal of Contemporary Accounting & Economics, 11(2), 121-137.. Available at SSRN: https://ssrn.com/abstract=3521178

Debarati Basu (Contact Author)

XLRI - Xavier School of Management ( email )

C H Area (E), Jamshedpur, Jharkhand
831001
India

HOME PAGE: http://https://acad.xlri.ac.in/facprofile/index.php?701

Kaustav Sen

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
212 618 6413 (Phone)
212 618 6410 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
70
PlumX Metrics