Impact of M&A on firm performance in India:Implications for concentration of ownershipand insider entrenchment

The literature is divided in its opinion about the impact of concentration of ownership on firmperformance. On the one hand, concentration of ownership that, in turn, concentratesmanagement control in the hands of a strategic investor, eliminates agency problemsassociated with dispersed ownership. On the other hand, it may lead to entrenchment of uppermanagement which may be inconsistent with the objective of profit (or value) maximisation.This paper examines the impact of M&A on profitability of firms in India, where thecorporate landscape is dominated by family-owned and group-affiliated businesses, such thatalignment of management and ownership coexists with management entrenchment, and drawsconclusions about the impact of concentrated ownership and entrenchment of ownermanagerson firm performance. Our results indicate that, during the 1995-2002 period, M&Ain India led to deterioration in firm performance. We also find that neither the investors in theequity market nor the debt holders can be relied upon to discipline errant (and entrenched)management. In other words, on balance, negative effects of entrenchment of ownermanagerstrumps the positive effects of reduction in owner-vs.-manager agency problems.Our findings are consistent with bulk of the existing literature on family-owned and groupaffiliatedfirms in India....