It’s in the group! Role of business group heterogeneity on the performance of M&A deals: evidence from India

Abstract

Purpose

We integrate agency theory and extended resource-based view (ERBV) to examine the impact of business group heterogeneity on the performance of the business group affiliated firms.

Design/methodology/approach

The differential ownership structure of business groups (degree of ownership by the promoter, domestic institutional and foreign institutional investors) determines the effect of intergroup heterogeneity, and the differential directors' interlocks (strength and type of directors in the interlocking arrangement) with the affiliated firms assess the impact of intragroup heterogeneity. Acquisition performance is operationalized through cumulative abnormal returns to the acquirer upon acquisition announcement and is computed using the standard event study methodology.

Findings

With 476 domestic and cross-border M&A deals announced in India between 2005 and 2021, our findings indicate that the firms affiliated with foreign and promoter-owned groups received positive announcement returns. Furthermore, the type of directors and the interlocks formed therein matter for an affiliated firm. While the affiliate’s executive and the non-executive non-independent directors on the board raise agency issues and negatively impact its performance, the independent directors mitigate them. Further, the market negatively views the interlocks formed by affiliated firms' non-executive, non-independent directors who undertake independent positions in other affiliated firms, as indicated by the negative announcement returns.

Originality/value

To the best of our knowledge, this is the first study to examine the impact of intergroup ownership heterogeneity on the acquisition performance of affiliated firms. Further, evaluating the effect of the type of interlocks in addition to strength is a distinctive feature of this research. This novel aspect of the study attempts to further understand the corporate governance of business groups and its implications, an area often referred to as the “black-box” in the business group literature.

Citation

Ahuja, S., Puri, V. and Jhunjhunwala, R. (2024), "It’s in the group! Role of business group heterogeneity on the performance of M&A deals: evidence from India", Managerial Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/MF-05-2024-0352