Group Affiliation and Firm Risk: Evidence from Stock Returns on Indian Companies

Abstract

This paper analyzes the effect of group affiliation on the riskiness of Indian companies. We show that the large difference in stock returns on group affiliates and on stand-alone companies cannot be explained by a standard multifactor model. However, the common variation in the returns on group company stocks suggests that there is a group affiliation factor in Indian stock returns. When we control for this additional factor, we find that about fifty percent of the underperformance of group companies can be explained by their lower risk. We also find evidence suggesting that the group affiliation factor is related to financial distress.

Keywords: Business groups, risk, firm value, stock returns

JEL Classification: G32, G34, G12