Performance Impact of Business Group Affiliation: An Analysis of Corporate Diversification Strategy

31 Pages Posted: 26 Mar 2006

See all articles by Manohar Singh

Manohar Singh

Willamette University - Atkinson Graduate School of Management

Ali Nejadmalayeri

University of Wyoming - College of Business

Ike Mathur

Southern Illinois University - Department of Finance

Date Written: January 31, 2006

Abstract

To understand the performance implications of corporate strategies as conditioned by business group affiliations, we analyze the relationship between corporate diversification and performance for 889 Indian firms. We find that diversified firms perform significantly worse than focused firms and that there exists a significant negative relationship between the degree of diversification and firm performance. A comparative analysis of firms affiliated with Indian business groups and those affiliated with MNCs indicates that sources of negative impact of diversification on performance are conditioned by the nature of a firm's affiliation. For multinational affiliates, diversification appears to be associated with poor asset quality and asset management, which is an indicator of possible agency conflict. For domestic business group affiliates, diversification appears to generate cost inefficiencies leading to poor performance.

Keywords: Diversification discount, Operating performance, Agency cost, Business groups, Emerging markets

JEL Classification: G30, G32, G34

Suggested Citation

Singh, Manohar and Nejadmalayeri, Ali and Mathur, Ike, Performance Impact of Business Group Affiliation: An Analysis of Corporate Diversification Strategy (January 31, 2006). Available at SSRN: https://ssrn.com/abstract=891893 or http://dx.doi.org/10.2139/ssrn.891893

Manohar Singh

Willamette University - Atkinson Graduate School of Management ( email )

900 State Street
Salem, OR 97301
United States

Ali Nejadmalayeri

University of Wyoming - College of Business ( email )

1000 E. University Avenue
Laramie, WY 82071
United States

Ike Mathur (Contact Author)

Southern Illinois University - Department of Finance ( email )

Mailcode 4626
Carbondale, IL 62901-4626
United States
618-453-1421 (Phone)
618-453-5626 (Fax)

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