Impact of M&A on Firm Performance in India: Implications for Concentration of Ownership and Insider Entrenchment

29 Pages Posted: 18 Mar 2007 Last revised: 5 Aug 2008

See all articles by Sumon K. Bhaumik

Sumon K. Bhaumik

Aston University - Aston Business School; Institute for the Study of Labor (IZA); University of Michigan at Ann Arbor - Stephen M. Ross School of Business, William Davidson Institute

Ekta Selarka

Madras School of Economics

Date Written: February 2008

Abstract

The literature is divided in its opinion about the impact of concentration of ownership on firm performance. On the one hand, concentration of ownership that, in turn, concentrates management control in the hands of a strategic investor, eliminates agency problems associated with dispersed ownership. On the other hand, it may lead to entrenchment of upper management which may be inconsistent with the objective of profit (or value) maximisation. This paper examines the impact of M&A on profitability of firms in India, where the corporate landscape is dominated by family-owned and group-affiliated businesses, such that alignment of management and ownership coexists with management entrenchment, and draws conclusions about the impact of concentrated ownership and entrenchment of ownermanagers on firm performance. Our results indicate that, during the 1995-2002 period, M&A in India led to deterioration in firm performance. We also find that neither the investors in the equity market nor the debt holders can be relied upon to discipline errant (and entrenched) management. In other words, on balance, negative effects of entrenchment of ownermanagers trumps the positive effects of reduction in owner-vs.-manager agency problems. Our findings are consistent with bulk of the existing literature on family-owned and groupaffiliated firms in India.

Keywords: mergers and acquisitions, corporate governance, manager entrenchment, firm

JEL Classification: G34

Suggested Citation

Bhaumik, Sumon K. and Bhaumik, Sumon K. and Selarka, Ekta, Impact of M&A on Firm Performance in India: Implications for Concentration of Ownership and Insider Entrenchment (February 2008). William Davidson Institute Working Paper No. 907, Available at SSRN: https://ssrn.com/abstract=970001 or http://dx.doi.org/10.2139/ssrn.970001

Sumon K. Bhaumik (Contact Author)

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, West Midlands B47ET
United Kingdom

Institute for the Study of Labor (IZA) ( email )

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

University of Michigan at Ann Arbor - Stephen M. Ross School of Business, William Davidson Institute

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

Ekta Selarka

Madras School of Economics ( email )

Gandhi Mandapam
Chennai-25
India

HOME PAGE: http://www.mse.ac.in/faculty/Ekta.asp

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