Published Online:October 2024
Product Name:The IUP Journal of Accounting Research & Audit Practices
Product Type:Article
Product Code:IJARAP011024
Author Name:Laila Memdani and Rajyalakshmi K
Availability:YES
Subject/Domain:Finance
Download Format:PDF
Pages:7-22
Concentrated founder ownership and a complex business group structure are unique to India. Prior research on the association between ownership structure and firm performance is available, but scant literature is available on this relationship in business group firms. As business groups have formal ownership ties like pyramidal structure and cross-shareholding among affiliated firms, it is an empirical question whether this relationship in business groups is the same as that of standalone firms. Hence, the study focuses on this unexplored area, analyzing the performance effects of founder ownership of business groups, and comparing it with standalone firms in India. The sample consists of unbalanced panel data of Indian listed business groups and standalone firms with 8,232 firm-year observations from 2019 to 2023. Applying the fixed effects regression method, the association between founder ownership and firm performance in business groups and standalone firms has been analyzed. It is found that founder ownership is not significantly related to firm performance in business groups, but significantly affects standalone firms. Further, it is found that performance increases with an increase in founder ownership up to 54% and, after that, decreases with an increase in founder ownership in standalone firms. Hence, it is concluded that the relationship is nonlinear, which takes the shape of an inverse U-shaped curve in nonaffiliated firms. The paper contributes to existing literature on business groups by providing comprehensive evidence of the impact of founder ownership on firm performance and comparing standalone firms in the Indian context.
Founders hold 53% of the share capital in 60% of the large 500 firms in India (Chakrabarti et al., 2008). Hence, Indian firms are characterized by concentrated founder ownership.