Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups


  • Tarun Khanna,

  • Krishna Palepu

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    • Graduate School of Business Administration, Harvard University. We are grateful to Bharat Anand, George Baker, Richard Caves, Raymond Fisman, Cynthia Montgomery, Raghuram Rajan, Jan Rivkin, Andrei Shleifer, Nicolaj Sigglekow, René Stulz, Lou Wells, Yishay Yafeh, two anonymous referees, and seminar audiences at the NBER Corporate Finance Spring 1996 meetings, Harvard, MIT, Stanford, Boston University, Hebrew University, Ecole Polytechnique, London Business School, ITAM (Mexico City), Tilburg University, the Academy of Management Meetings (Cincinnati, 1996), and the Strategic Management Society Meetings (Phoenix, 1996) for very helpful comments. We are also grateful to the Centre for Monitoring the Indian Economy (CMIE) and the Institute of Chartered Financial Analysts of India (ICFAI) for helping to assemble the data set, to several colleagues who manage diversified groups and run financial institutions in India for their guidance and insight, to James Schorr for excellent assistance with the data, and to the Harvard Business School Division of Research for financial support. All errors remain our responsibility.


Emerging markets like India have poorly functioning institutions, leading to severe agency and information problems. Business groups in these markets have the potential both to offer benefits to member firms, and to destroy value. We analyze the performance of affiliates of diversified Indian business groups relative to unaffiliated firms. We find that accounting and stock market measures of firm performance initially decline with group diversification and subsequently increase once group diversification exceeds a certain level. Unlike U.S. conglomerates' lines of business, and similar to the affiliates of U.S. LBO associations, affiliates of the most diversified business groups outperform unaffiliated firms.