Emerging market business groups and firm risk: Effects of internal capital markets, corporate governance and capital structure

This thesis examines an important yet largely unexplored inner-workings of business group affiliation in emerging economies by exploring firm risk of group affiliates in comparison to their non-group firms. Using data for seven financial years the analysis focused on group affiliated firms and non-group firms in India, one of the largest emerging economies. The study is done in three phases. In the first study, the impact of business group affiliation on firm risk relative to non-group firms is examined. Followed by analysing if the difference between risk-taking by business-group affiliated firms and non-group firms depends on the relative size, sales revenue and cash flow of a firm within a business group, and finally on the relative bankruptcy risk of a firm. The second study extended the analysis by examining the impact of corporate governance on risk-taking, and the difference in the impact of these corporate governance variables between business group affiliated and non-group firms. The proxies for corporate governance include a wide range of board characteristics. Finally, the study extended the modelling of firm-level risk by considering the two-way relationship between risk and capital structure using a structural equation modelling (SEM) framework.