Business groups and profit redistribution: A boon or bane for firms?

This article examines the phenomenon of profit redistribution in Indian business groups and relates redistribution with the underperformance of group-affiliated firms relative to unaffiliated firms. The study also documents that profit redistribution is more pronounced in groups of large sizes and high levels of corporate control. The relative underperformance of affiliated firms persists even after controlling for other explanations such as corporate diversification and resource transfers to unlisted firms. The empirical results of the study lend support for the inefficient profit redistribution explanation of the “business group discount”.