Should Business Groups be in Finance? Evidence from Indian Mutual Funds
55 Pages Posted: 2 Jan 2014 Last revised: 27 Mar 2019
Date Written: March 1, 2019
Abstract
A primary risk associated with business groups entering the financial sector is that groups will misallocate capital to own group firms, hurting investors and economic development. We study this issue in the context of business group owned mutual funds in India, where business groups have been present for over twenty years, and we can observe capital allocation decisions monthly. Business-group owned funds do not over-weight member firms, nor do they prop up member firm stocks or earn excess returns on their member firm investments. Business-group funds have an advantage when they focus on industries where the group operates, although we cannot distinguish whether this is due to insider trading versus (legal) specialization. Current regulations appear sufficient to prevent capital misallocation in member firms, but monitoring of investments in related sectors seems warranted.
Keywords: Business Groups, Emerging Markets
JEL Classification: D23, G30
Suggested Citation: Suggested Citation