Should Business Groups be in Finance? Evidence from Indian Mutual Funds

Document Type

Article

Publication Date

3-29-2019

Publication Title

Journal of Development Economics

Volume

139

First page number:

229

Last page number:

248

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.

Disciplines

Asian Studies | Business Law, Public Responsibility, and Ethics | Finance | Law and Economics | Legal Ethics and Professional Responsibility

Language

English

UNLV article access

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