How do business groups evolve? Evidence from new project announcements

Using a unique data set of investment projects from India, we examine how business groups choose between implementing a new project within an existing firm (“integration”) versus implementing in a new firm (“non-integration”). While industry commonality is an important determinant of this choice, we document that it is also common for groups to house diversification projects in existing firms. Larger and more profitable groups are more likely to integrate projects, and the integrated projects are more likely to be from less profitable industries. Within the group, projects are more likely to be integrated into larger and more profitable firms. Interestingly, diversification projects from profitable industries are more likely to be integrated into high insider holding firms. On average, the market reacts more positively to project announcements by high insider holding firms. Overall, our results suggest that a key determinant of integration is to use an existing group firm’s cash flows to support the new project, and also that insiders expropriate minority shareholders by selectively implementing profitable projects in high insider holding firms. ∗School of Business and Elliott School of International Affairs, George Washington University. email: [email protected]; ph: (202) 994-1292 †Olin Business School, Washington University. email: [email protected]; ph: (314) 935-9196. ‡Kelley School of Business, Indiana University. email: [email protected]; ph: (812) 855-2694.