Business Groups and Profit Redistribution: A Boon or Bane for Firms?

49 Pages Posted: 5 Jan 2005 Last revised: 1 Aug 2012

See all articles by Rejie George

Rejie George

Indian Institute of Management Bangalore

Rezaul Kabir

University of Twente - Department of Finance and Accounting

Date Written: September 1, 2008

Abstract

This study examines the phenomenon of profit redistribution among group-affiliated firms and relates it with corporate performance. It finds that group-affiliated firms perform poorly relative to independent firms. More importantly, the study documents the possibility of inefficient profit redistribution causing group-affiliated firms to underperform. Profit redistribution is also documented to be more pronounced for groups of larger size and greater corporate control. The underperformance of affiliated firms persists even after controlling for other explanations such as diversification and resource transfers to unlisted firms. The results of the study lend support for the inefficient profit redistribution explanation of the 'business group discount'.

Keywords: Business groups, firm performance, profit redistribution, cross-subsidization, corporate governance

JEL Classification: G3, L2, M2

Suggested Citation

George, Rejie and Kabir, Rezaul, Business Groups and Profit Redistribution: A Boon or Bane for Firms? (September 1, 2008). Journal of Business Research, Vol. 61, No. 9, 2008. Available at SSRN: https://ssrn.com/abstract=642404 or http://dx.doi.org/10.2139/ssrn.642404

Rejie George

Indian Institute of Management Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India
+91-80-26993042 (Phone)
+91-80-26584050 (Fax)

Rezaul Kabir (Contact Author)

University of Twente - Department of Finance and Accounting ( email )

Faculty of Behavioral, Management & Social Science
P. O. Box 217
Enschede, 7500 AE
Netherlands
+31 53 489 4512 (Phone)
+31 53 489 2159 (Fax)

HOME PAGE: http://https://people.utwente.nl/r.kabir

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