Business Group Affiliation, Firm Governance, and Firm Performance: Evidence from China and India

• Author: Deeksha A. Singh,Ajai S. Gaur
• Date: 01 July 2009
• Published date: 01 July 2009
• DOI: http://doi.org/10.1111/j.1467-8683.2009.00750.x

Business Group Aff‌iliation, Firm Governance,

and Firm Performance: Evidence from China

and India

Deeksha A. Singh* and Ajai S. Gaur

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This study seeks to understand how business group aff‌iliation, within f‌irm governance and

external governance environment affect f‌irm performance in emerging economies. We examine two aspects of within f‌irm

governance – ownership concentration and board independence.

Research Findings/Insights: Using archival data on the top 500 Indian and Chinese f‌irms from multiple data sources for

2007, we found that group aff‌iliated f‌irms performed worse than unaff‌iliated f‌irms, and the negative relationship was

stronger in the case of Indian f‌irms than for Chinese f‌irms. Wealso found that ownership concentration had a positive effect

on f‌irm performance, while board independence had a negative effect on f‌irm performance. Further, we found that group

aff‌iliation – f‌irm performance relationship in a given country context was moderated by ownership concentration.

Theoretical/Academic Implications: This study utilizes an integration of agency theory with an institutional perspective,

providing a more comprehensive framework to analyze the CG problems, particularly in the emerging economy f‌irms.

Empirically, our f‌indings support, as well as contradict, some of the conventional wisdom, and suggest useful avenues for

future research.

Practitioner/Policy Implications: This study shows that reforms in general and CG reforms in particular are effective in

emerging economies, which is an encouraging sign for policy makers. However, our research also suggests that it may be

time for India and China to stop the encouragement for the empire building through group formation in the corporate

world. For practioners, our f‌indings suggest thatf‌irms need to balance the need for oversight with the need for advice, while

selecting independent directors.

Keywords: Corporate Governance, Ownership Concentration, Board Independence, China, India

INTRODUCTION

With an increasing integration of world economies and

the growth of large organizations, corporate gover-

nance (CG) has emerged as an important issue for scholars

as well as managers all over the world. Using agency theory

as the dominant theoretical paradigm, the extant literature

has mainly focused on the eff‌icacy of various governance

mechanisms that protect the shareholders from self serving

managers (Rajagopalan & Zhang, 2008). Much of this

research is situated in the context of developed economies,

where the external governanceenvironment and institutions

to support the internal f‌irm governance are stable and well

developed (Judge, Douglas, & Kutan, 2008).

While a focus on within f‌irm governance mechanisms has

advanced our understanding of the links between gover-

nance standards and f‌irm performance, there is an increas-

ing realization that the eff‌icacy of within f‌irm governance

may be dependent on the qualityof external governance and

institutions (Judge et al., 2008). This issue is particularly

important for emerging economies, which often lack the

institutions needed to support eff‌icient within f‌irm gover-

nance (Peng, 2003). It is well documented that many emerg-

ing economies, such as India and China, do not have well

developed external control mechanisms, such as a market

for corporate control, merger, and acquisition laws, and eff‌i-

cient law enforcement (Khanna& Palepu, 2000a; Peng, 2003).

This not only makes it more diff‌icult to govern the organi-

zations, but also makes standardCG practices less legitimate

(Judge et al., 2008).

*Address for correspondence: Department of Business Policy, National University of

Singapore, Singapore, 117592. Tel: 1-757-401-5963; E-mail: deeksha@nus.edu.sg

411

Corporate Governance: An International Review, 2009, 17(4): 411–425

© 2009 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2009.00750.x