Understanding the Dynamics of Business Groups in Pakistan. A Focus on the Financial Performance and Dividend Policy.


This thesis attempts to provide empirical evidence in the eld of corporate nance by focusing at two major areas of nancial performance and dividend policy in an emerging market. The thesis is divided into three parts. The rst part of thesis analyses the performance and risk sharing phenomenon of diversi ed business groups relative to standalone rms during a time when economic and institutional environment is changing. The performance comparisons are made in three dimensions including Excess value, Excess pro tability and Risk. The study employs both univariate analyses and regression analyses. Based on Chop Shop methodology, the study nds that Excess value-sales is signi cantly lower for group aliated rms than standalone rms. The results demonstrate that group aliated rms are trading at discount (underperform) as compared to their counterpart standalone rms. Group diversi cation discount is present yet it is not homogeneous across all business groups: group discount for rms aliated with least diversi ed business groups is relatively higher than rms aliated with intermediate diversi ed and most diversi ed business groups. The results of Excess pro tability (operating) clearly indicate that diversi ed business groups enjoy higher pro tability than their corresponding standalone rms in Pakistan. However, there is a continuous decline in Excess pro tability (operating) in every subsequent sub-period. Moreover, the ndings of Risk-operating pro ts variability analyses suggest that group affliated rms exhibit lower level of risk than standalone rms. The study provides an evidence of the risk sharing role of business groups among their group affiliates in Pakistan. The study applies robustness checks of Excess value-EBIT, Excess pro tability (net) and Risk-net pro ts variability that con rm the above results. The study employs a relatively large, contemporary and time varying database of Pakistani rms covering a period of 1993-2012. Despite the historical success in the past, the ndings suggest that business groups evolve differently in the post fi nancial reforms and privatization programs era. In the second part of thesis, an effort is made to examine the relationship between ownership structure and rm performance particularly focusing to answer the question whether corporate ownership reasonably explains the difference in performance of group rms than standalone rms in Pakistan. The ndings reveal that Ownership disparity strongly negatively a ects the performance of group rms. Institutional ownership and Domestic private institutional ownership positively a ect the performance of both standalone rms and group rms and however, the strength of relationship is stronger for group rms. Further, the results indicate that both Relational ownership and Ownership concentration strongly negatively a ect group rms’ performance whereas these a ect positively or insigni cantly standalone rms’ performance. The ndings suggest that as the ownership-control disparity widens, it enhances the potential of the ultimate controller in tunneling rm resources at the expense of minority shareholders. Most importantly, institutional investors particularly, domestic private institutional investors seem strongly in uential in the monitoring of ultimate controllers in business groups. Finally, in the third part of thesis, dividend payout behavior of group rms in general and pyramidal rm in particular is investigated in the light of `agency theory’ and `expropriation hypothesis’. The results propose that diversi ed group rms and pyramidal rms pay signi cantly lower dividends than standalone rms consistent with the expropriation hypothesis (La Porta et al., 2000). Ownership disparity strongly negatively a ects dividend policy of group rms. Relational ownership and Ownership concentration seem signi cantly negatively a ecting group rms’ dividend policy. The ndings suggest that institutional investors in general and domestic private institutional investors in particular are in uential in a ecting dividend policy of group rms. The study provides important insights in an emerging market context.

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