A Reexamination of Tunneling and Business Groups: New Data and New Methods

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday April 7, 2010 at 9:15 am
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Editor’s Note: This post comes to us from Jordan Siegel, Associate Professor of Business Administration at Harvard Business School, and Prithwiraj Choudhury, Doctoral Candidate in Strategy at Harvard Business School.

In our paper, A Reexamination of Tunneling and Business Groups: New Data and New Methods, which was recently made publicly available on SSRN, we look at emerging economies in general and at India in particular and argue for a simultaneous analysis of corporate governance and strategic activity differences in order to reveal the true quality of firm-level corporate governance.

The last decade of corporate governance research has been focused in large part on identifying what leads to superior or deficient corporate governance in emerging economies, and we think the conventional wisdom about the economically important topics of tunneling and business groups will need to be significantly questioned and reformulated in light of new findings, data, and methodology presented here. We propose the idea that firms’ corporate governance and firms’ strategic business activities within an industry are interlinked, and that only by conducting a simultaneous economic analysis of business strategy and corporate governance can scholars fully discern the quality of a firm’s governance. We advance this idea by taking a fresh look at one of the most rigorous extant methodologies for detecting “tunneling,” or efforts by firms’ controlling owner-managers to take money for themselves at the expense of minority shareholders.

We show that efforts to discern which firms have superior or deficient corporate governance in the important emerging economy of India turn critically on whether one does a simultaneous economic analysis of business strategy and corporate governance. We find in contrast to prior views that Indian business groups are not, on average, engaging in tunneling, but are on average exhibiting good corporate governance, especially in light of the markedly different business strategies they typically undertake. Moreover, unlike many past conceptions of business groups from financial economics, sociology, and strategy, we find evidence for a knowledge-based “recombinative capabilities” view of business groups—that such groups have done the most to invest in R&D and other skills necessary to combine inputs in ways that lead to greater added value. Moreover, our finding that Indian business groups have grown larger and more diversified since liberalization and since broad-based corporate governance reforms were implemented goes expressly against the prediction of prior schools of thought about business groups.

The full paper is available for download here.

  1. I agree with the certain facts regarding the tunneling and business groups involving the new data.The last decade of corporate governance research has been focused in large part on identifying what leads to superior or deficient corporate governance in emerging economies.I know that evidence for a knowledge-based “recombinative capabilities” view of business groups—that such groups have done the most to invest in R&D and other skills necessary to combine inputs in ways that lead to greater added value.

    Comment by Wedding Marquee Hire Sevenoaks — April 9, 2010 @ 2:53 am

 

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