Business groups and corporate transparency in emerging markets: Empirical evidence from India
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Business groups and corporate transparency in emerging markets: Empirical evidence from India Chinmay Pattnaik & James Jinho Chang & Hyun Han Shin
Published online: 4 November 2011 # Springer Science+Business Media, LLC 2011
Abstract This study examines the difference in corporate transparency of firms affiliated with business groups and unaffiliated firms in India. Based on previous studies we measured corporate transparency using equity analysts’ forecast error and dispersion. We find that firms affiliated with business groups are less transparent than unaffiliated firms. Lack of transparency leads to higher analyst forecast error and dispersion. This study also finds that business group-affiliated firms with more intra-group capital transactions have higher forecast error and dispersion. The findings of this study suggest that firms affiliated with business groups are less transparent due to their reliance on internal capital markets, and therefore lack incentives to disclose information to market participants. As a result, the information asymmetry between business groups and the capital market is higher, restricting the activities of information intermediaries such as equity analysts, who play an important role in the external capital market. Keywords Corporate transparency . Corporate disclosure . Corporate governance . Business groups . Emerging markets . India Corporate transparency is the disclosure of firm-specific information to outside constituents of publicly traded firms (Bushman, Piotroski, & Smith, 2003). It is integral to corporate governance and crucial for the efficient functioning of capital C. Pattnaik (*) Discipline of International Business, The University of Sydney Business School, N434 Storie Dixson Wing Building H10, Sydney, NSW 2006, Australia e-mail: [email protected] J. J. Chang : H. H. Shin Yonsei School of Business, Yonsei University, Seodaemun-gu, Seoul 120-749, Korea J. J. Chang e-mail: [email protected] H. H. Shin e-mail: [email protected]
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markets (Healy & Palepu, 2001). The lack of disclosure of firm-specific information increases the information asymmetry between the firm and market participants such as investors, equity analysts, and other stakeholders (Verrechia, 2001). Increased information asymmetry between a firm and its financial stakeholders creates difficulty in evaluating or predicting the performance of the firm, leading to the loss of investor confidence, which subsequently increases financing costs (Healy, Palepu, & Sweeny, 1995; Krishnaswami & Subramaniam, 1999). Moreover, lack of disclosure or corporate transparency restricts the effective functioning of market intermediaries such as equity analysts, who play an essential role in capital markets delivering new information about a firm to investors and stock traders (Healy, Hutton, & Palepu, 1999; Lang & Lundholm, 1996). In the long run, lack of information disclosure impedes the effective functioning of capital markets (Khanna, 2000; Rajan & Zingales, 1995). Due to a lack
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