Business groups, block holdings and firm value

In this article, we examine two critical aspects of the Indian corporate governance system, that is, influence of group affiliation and diversification on firm performance and impact of block holders on firm value. Using 1833 publicly listed firms for the year 2001–2004, we document that the benefits associated with business group affiliation is no longer observed in the post-economic reform era. Instead we find that standalone firms outperform the group affiliated firms when we control for firm-specific characteristics. Group formation has lost its internal capital market advantage over standalone firms due to the expansion of Indian capital market. Similarly, group diversification strategy is seen to be sub-optimal and diversification appears to be value-destroying. Among the major block holders, domestic financial institutions are found to be playing an insignificant role in comparison to the domestic and foreign institutional investors.