Journal of Applied Finance & Banking

Cross Subsidization and its Effect on Pakistani Business Group’s Affiliated Firm Performance

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• Abstract

  This study provides a contribution to the existing literature on the role of business groups in the world and in Pakistan in particular. The analysis shows that stock market and accounting performance measures of Pakistani group unaffiliated firms are significantly superior to those of affiliated firms. This study further investigated that groups subsidize their unprofitable firms, which is associated with negative effect of cash flow dummy that reduce significantly the value of affiliated firm’s Tobin’s q more than unaffiliated firms. The increased use of debt by groups might be explained by a possible apparent tax advantages that groups enjoy from this use of debt. Taken as a whole, our evidence implies that group affiliated firms underperform unaffiliated firms in Pakistan.