The study analyses the group diversification-performance relationships in an emerging market context. The study employs a relatively large, contemporary and time varying database of Pakistani listed firms covering a period of 1993-2012. Based oil "Chop Shop" methodology, the study finds the presence of group diversification discount in Pakistan. Group diversification-performance relationship is strongly negative and group diversification seems harmful for firm value consistent with the market failure theory and agency theory. Further, the study also finds an evidence of non-linear group diversification-performance relationship and it is explicitly negative-positive-negative. Moreover, the results of sub-period samples demonstrate an ever present group diversification discount in each sub-period. The ultimate controllers in diversified business groups are engaged in more diversification activities in order to bring assets worth more under the group control with least capital investment for the maximisation of their own wealth instead of keeping the profits potential of these investments. Group diversification seems a root cause of agency conflicts among the ultimate controlling shareholders and minority shareholders in the group affiliated firms and thus detrimental for firm value.

Keywords: Group Diversification; Business Groups; Excess Value; Group Premium/Discount; Internal Markets Argument; Agency Theory; Market Failure

1. INTRODUCTION

Group diversification is widely researched area in the field of corporate finance and firm strategy in the last couple of decades. Many researchers provide empirical evidences regarding the group diversification-performance relationship yet it is unclear whether it is beneficial or harmful for the firm value. While a number of studies find a robust group diversification discount in the developed economies, conversely, many other studies report group diversification premium in developing countries in the past. The recent studies document a group diversification discount in emerging economies which propose that group affiliated firms pursuing diversification strategies are valued lower than their counterpart standalone firms not following such strategies [Lins and Servaes (2002)].

A few researchers focus on examining if affiliation with a diversified business groups is a source of premium or discount in a changing institutional context? They opine that group diversification premium exist in emerging markets during the periods of underdeveloped institutional environment and further affiliation with diversified business groups rarely entails such diversification premium in the latter periods when there is a remarkable development in the institutional setting in the country. These studies reveal that group diversification-performance relationship is contingent upon the institutional environment of the country [Lee, et al. (2008)].

Khanna and Palepu (2000a) and Chang and Choi (1988) among others observe that group diversification enhances firm performance in the countries with weak institutional environment. They argue that diversified business groups' internal market networks substitute for missing capital, labour and product markets in such countries. Lins and Servaes (2002) find a significant diversification discount for affiliated with diversified business groups relative to single segment firms in seven emerging markets. They suggest that business groups pursue diversification strategy for tunnelling firm resources at the expense of minority shareholders and this activity causes serious agency conflicts among the shareholders that destroy firm value.

A number of researchers for instance Lee, Peng and Lee (2008) and Khanna and Palepu (2000b) report a declining trend in performance impacts of group diversification in South Korea and Chile. They opine that positive effect of group diversification on firm performance disappears as the institutions developed in the country. Conversely, Khanna and Rivkin (2001) compare the performance of firms affiliated with diversified business groups across 14 emerging countries and find mixed evidences. They report that affiliation to diversified business groups is positively related to firm profitability in 6 countries, whereas it is detrimental in 3 countries and yet it plays no significant role in affecting firm performance in remaining 5 countries. These findings reveal that group diversification-performance relationship is yet inconclusive and is needed to be further explored. The present study focuses on internal markets argument and agency theory in a changed institutional environment in an emerging country context.

In emerging markets, the governance infrastructure is characterised by lack of transparent regulatory framework, presence of weak law enforcement system and inefficient and corrupt governments. These governance failures restrict the emergence of efficient markets and institutions [Khanna and Palepu (2000a); Estrin, et al. (2009)]. Business groups' internal market mechanism substitute for external environment and fill the gap of missing or inefficient capital, labour and product markets and other supporting institutions those are needed to accomplish various business transactions [Leff (1978); Khanna and Palepu (1997)]. The internal markets reduce transaction costs and helps in efficient resource allocation among the member firms of these diversified business groups. Thus diversified group firmsmay get benefits from the group's internal networks in order to alleviate institutional voids [Khanna and Palepu (2000a)]. A firm affiliated with a prestigious business group may access the reputation capital of the business group and it may help in getting better financial outcomes [Barney (1991); Chang and Hong (2000)]. Market failures and institutional voids can also increase the gains from access to superior political connections and social linkages.

However, business groups diversified at various levels have heterogeneous characteristics those may affect firm performance differently [Kim, et al. (2004); Khanna and Yafeh (2005)]. The firms affiliated with the larger and more diversified business groups are able to avail certain valuable, rare and imitable resources. These enable them to generate relatively more value for their affiliated firms. Further, there are plenty of costs tied with the operations of diversified business groups including coordination and management costs, bureaucratic cost, etc. those a small business group might not afford.

Agency theorists argue that ultimate controllers of the diversified business groups pursue diversification strategies for merely controlling the assets worth more under their control. They use cross shareholdings and pyramidal structures, cross directorate-ship interlocking and dual class share structures to achieve their ultimate control over many firms. Moreover, least participation of the general public in the corporate voting further augments their control. Such control enhancing mechanism of diversification used business groups enable the ultimate controllers enjoy excess control over cash flow rights. It causes divergence of interest of the ultimate controllers that motivates them engage in tunneling firm resources at the cost of external shareholders. This is the root cause of serious agency conflicts among the controlling shareholders and external shareholders which is harmful for firm value [La Porta, et al. (1999); Bertrand, et al. (2002)].

In Pakistan, privatisation programmes were initiated in the late 1980s for the businesses those were nationalised earlier during the course of nationalisation programmes during 1970s. Further, there were financial reforms and liberalisation programmes started in early 1990s. These steps towards the financial development and markets' openness changed the economic landscape for the business groups owning to diversification strategies. The product and capital markets were more open for foreign investors and those diversified business groups having flourished under the auspices of the governments (for instance foreign exchange and import quota systems, rent seeking, cross subsidies, etc.) and further enjoying benefits of internal markets (based on underdeveloped markets) unavailable to standalone non-diversified firms may have suffered. As the rule of game changes (institutions develop), the business groups depending on such capabilities owing to diversification and further being engage in tunnelling firm resources, have to restructure their diversification related activities and improve internal corporate governance system to compete in the changing product, capital and labour markets [Chakrabarti, et al. (2007); Purkayastha (2013)].

Many studies explore group diversification-performance relationships in a unitary lens. However, a unitary theoretical perspective provides a partial view of the relationships and does not cover either the contrasting views of the anecdotes or existing theories; or their reinforcing effects that are inherent in the dynamics of the relationships [George and Kabir (2008)]. In an emerging or transitions economy, it is important to examine the relationships by applying multi-theoretic lens of various strands of internal markets, agency theory and institutional settings. Although, there is no dearth of researches investigating the impact of group diversification on firm performance, relatively a limited number of studies focus on the moderating role of organisational and governance factors like internal markets and agency theory in a changed institutional perspective. The present study is an effort to fill this gap in the literature in context of an emerging economy.

The study attempts answering few questions:

(i) Does group diversification enhances firm performance or destroys firm value?

(ii) Does group diversification-performance relationship remain consistent or it is changing over the longer periods?

(iii) Is group diversification-performance relationship linear or non-linear in nature?

The study is very important in Pakistani context many ways. First, the study is conducted in Pakistani market where diversified business groups are a dominant character of the corporate sector. The earlier studies are conducted either in a cross country context [for instance Lins and Servaes (2002)] or a country specific [for instance Lee, Peng, and Lee (2008); Khanna and Palepu (2000b)]; both missing the Pakistani context. Second, although, diversified business groups are the striking feature of Pakistani business environment but the group firms are affiliated with a single business group and therefore, sample's size of the study will be very large. Third, although group firms in Pakistan are typically focused but the business groups are well diversified across various industries, thus group diversification-performance relationship seems worth full.

Most importantly, financial reforms and liberalisation programmes have altered the economic landscape of Pakistani economy. Hence, business groups were a success story in the past, the study attempts examining the group diversification-performance relationship in a changed institutional setting if group diversification strategy is still worth full and value enhancing activity or it is a device of expropriation of firm resources by the ultimate controlling shareholders in the diversified group affiliated firms? Finally, the study modifies the well documented methodology of Berger and Ofek (1995) for group diversification premium and/or discount. In the best knowledge of the researchers, this is the pioneer study being conducted in this direction in Pakistan. The study will provide empirical evidence in the field of corporate finance and firm strategy in context of an important emerging market of Pakistan.

1.1. Diversified Business Groups Around the World

Business groups are the coalitions of legally independent firms connected each other through formal and informal ties and are accustomed to taking coordinated actions [Granovetter (1995); Khanna and Rivkin (2001)]. The formal ties include controlling group members' commonality in ownership and informal ties include similar personal, ethnic and communal background of the members. Diversified business groups are well pronounced around the world. These play an important role and contribute significantly to the gross national product of many economies. Pakistani business groups, though themselves are often highly diversified but the individual firms in each group are typically focused. Some of the largest diversified business groups are active in broad range of industries from automobile assembling to educational services.

Diversified business groups are dominant character of various economies and contribute largely to the GDP. The contribution of top 10 diversified business groups towards the GDP is about 30 to 40 percent for South Korea, Indonesia, Spain and Mexico [George and Kabir (2008)]. Business groups contribute 60 percent of the industrial output in China [Yiu, et al. (2005)] whereas the corresponding figure is 45 percent for top 100 BGs in Taiwan [Chu (2004)]. These contribute approximately 75 percent of the total industrial out in private sector of India [Purkayasthi (2009)]. Business groups possess about 65 to 70 percent of the productive corporate assets in the corporate sector of Pakistan [Ghani, Haroon, and Ashraf (2011); Gohar and Karacaer (2009)].

2. REVIEW OF LITERATURE

2.1. Group Diversification, Internal Markets and Firm Performance

The internal markets argument suggests that diversified business groups possess value enhancing networks those permit them sharing resources among their affiliates. The resources may include information, inputs, skills and management and most importantly finance [Khanna and Palepu (1997)]. Diversified business groups develop dynamic capabilities like technology innovations, brand names, and managerial skills those are valuable in obtaining various resources and inputs, and market access to repeatedly entering new industries [Guillen (2000)]. Firms affiliated with a large diversified business group can exploit the group's specific assets and resources [Wemerfelt and Montgomery (1988)]. Skills developed in one group affiliate may be transferred to another and it can increase labour and capital productivity.

Diversified firms may use a plenty of ways to create and exploit market power benefits, mechanisms that are mostly unavailable to the more focused counterpart firms for instance entry deterrence, predatory pricing, cross-subsidisation, and reciprocal buying and selling [George and Kabir (2008)]. The benefits for business groups owing to diversification strategy may also include economies of scale, improved debt capacity, and reduced chances of bankruptcy [Lewellen (1971)]. Kim, et al. (2004) document various privileges available to diversified Japanese Keiretsus including availability of complementary resources, economies of large scale, access to product markets and associated risk sharing. Chang and Choi (1988) observe group diversification premium for firm affiliated with diversified business groups when compared with independent non-diversified firms in South Korea. They suggest that advantage for diversified groups firms stem from relatively lower transaction costs and efficient management. While investigating the roles of Japanese Keiretsus in tunneling or propping and internal capital markets during the period of remarkable economic change. Dow and Mcquire (2009) find evidence of propping up the weaker member firms by the stronger ones during the economic recession periods.

2.2. Group Diversification, Agency Costs and Firm Performance

Diversified group firms suffer from serious corporate governance problems [Bebchuk, et al. (2000); Bertrand, et al. (2002)].The ultimate controllers are engaged in more diversification activities in these firms. The stylised pyramidal ownership structures allow them controlling many firms with least capital investment [La Porta, et al. (1999)]. This pattern of ownership-control is also termed as 'controlling minority structure' that enables ultimate controllers enjoy excess control rights than cash flow rights in diversified business groups and it is the root cause of severe agency conflicts between ultimate controlling shareholders and minority shareholders [Bebchuk, et al. (2000); Joh (2003)]. Consequently, diversified group firms may face entrenchment problems and incentives misalignment concurrently [Morck and Yeung (2003)]. The dominant controllers may exert their entrenched behaviour and engage in tunneling firm resources at the expense of external shareholders that may be detrimental for firm value.

Further, diversified business groups use investment activity as a source of tunneling where primary goal is not profit potential of investments rather bringing assets worth more under the group control [Bertrand, et al. (2002); Friedman, et al. (2003)]. The over-investment and in-efficient investment detriment firm value [Lee, Ryu, and Yoon (2002b); Lee (2002)]. Tunneling can also take other forms like transfer pricing, leasing of assets and providing loans at non-market rates. Moreover, group headquarters cross subsidises the operations of weaker units and split that cost among stronger units, thus diversified business groups focus group stability and survival that consequently may affect negatively the performance of profitable ones [Bertrand, et al. (2002); Ikram and Naqvi (2005)]. The study of Gohar and Karacaer (2009) demonstrates that group diversification harms firm value and they suggest that member firms of business groups diversified at different levels suffer from agency problems and engage in expropriation of minority shareholders.

2.3. Role of Institutional Environment in Group Diversification--Performance Relationship

A few studies on group diversification conclude that institutional environment matters. The relationship between strategic choices and financial outcomes is dynamic and contingent on the institutional environment [Chakrabarti, et al. (2007); Lee, et al. (2008); Purkayastha (2013)]. Based on the data between 1970s and 1990s, the studies for instance Chang and Choi (1988), Khanna and Palepu (2000a), Keister (2000), Guillen (2000) among others conclude that group diversification enhances firm performance. Contrarily, the studies based on recent data suggest that group diversification hampers firm performance for instance Bertrand, Mehta and Mullainathan (2002), Lins and Servaes (2002), Ferris, Kim and Kitsabunnarat (2003), Joh (2003) among others.

Another group of researchers employ longitudinal data and however, report a significant change in the pattern of group diversification-performance relationship with the change in institutional environment in the country. Lee, Peng, and Lee (2008) find group diversification premium until early 1990s and then group premium started decreasing and finally turned into discount in 1994 in South Korea. In order to find out group premium and discount, they adopt valuation approach proposed by Berger and Ofek (1995). The findings are consistent with the market failure argument that group diversification premium turned into discount as the institutions developed in the country and advantageous effect of diversified business groups' internal markets disappeared. In the same lines, Khanna and Palepu (2000b) report a declining trend in the profitability of firms affiliated with diversified business groups over the period of decade characterised by financial reforms and improvement in institutional infrastructure in Chile.

2.4. Is Group Diversification-Performance Relationship a Linear in Nature?

Large diversified business groups could internalise the bureaucratic and coordination costs associated with the management of diverse operations of the group more efficiently and are consequently able to generate more value for their member firms. Further, small diversified business groups might not have requisite managerial talent, efficient internal resource sharing networks and political influences to gain advantages sufficient in offsetting the potential costs tied with the group affiliation [Khanna and Palepu (2000a)]. While exploring the potential impacts of group diversification on firm performance, Khanna and Palepu (2000a) observe a non-linear relationship between group diversification and firm profitability in India. The findings propose that group diversification creates value only for firms affiliated with large diversified business groups. In the same lines, Khanna and Palepu (2000b) observe similar nature of relationship (non-linear) in Chile. They include group diversification squared term in the regression model and find that group diversification-performance relationship is explicitly negative-positive. The coefficient of group diversification is significantly negative whereas group diversification squared is significantly positive. The findings demonstrate that firm performance initially declines with increase in group diversification and then subsequently increases when group diversification exceeds a certain threshold level.

2.5. Hypotheses

The internal markets and agency costs arguments led us the following hypotheses:

H [1.sub.a]: There is a significantly positive impact of group diversification on firm performance in Pakistan.

H [1.sub.b]: There is a significantly negative impact of group diversification on firm performance in Pakistan.

H 2: There is a significantly non-linear group diversification-performance relationship in Pakistan.

3. METHODOLOGY

The study employs a sample of 367 Karachi Stock Exchange listed firms. KSE is the leading stock exchange of Pakistan and information pertained to stock market prices and annual reports are easily available for these firms. It is mandatory for KSE listed firms to prepare financial statements in accordance with IASs and IFRSs, thus posit confidence on the accuracy and reliability of the financial information. The study excludes financial service firms like banks, insurance companies and mutual funds because one cannot construct the excess value based on sales. Government controlled firms and foreign subsidiaries are also excluded in order to make our results comparable with prior studies. Diversified group firms are chosen on the basis of ultimate control of members under the umbrella of a particular group. The ultimate control is determined by examining the social ties, management, cross directorate-ships, cross shareholdings and pyramidal structures. (2)

Group diversification creates or destroys value? To answer this question "Chop Shop" approach has been adopted by many researchers in finance for instance Berger and Ofek (1995), Lang and Stulz (1994), Ferris, et al. (2003), Lee, et al. (2008). In order to make our results comparable with earlier studies, the study adopts the same approach. One can reasonably approximate the imputed value of a diversified group affiliated firm by multiplying the diversified group firm's sales with the ratio of capital to sales ratio for median non-diversified standalone firm operating in the same industry. (3) The excess value is obtained as the natural log of the ratio of firm's actual value (defined as market value of equity plus book value of liabilities) to its imputed value. (4) The positive excess value proposes that group diversification enhances firm performance. On the other hand, negative excess value shows that group diversification destroys firm value.

In order to examine the impact of group diversification, the study employs group diversification measure. Since each firm within a diversified business group usually specialises in one industry, number of affiliated firms belong to a business group is an indicative of the scope of group level diversification [Lee, Peng, and Lee (2008)].

The study measures the performance at firm level rather focusing the group level performance due to several reasons. First, diversified business groups are not the legal entities rather these are fictitious. Whereas, a firm affiliated with a diversified business group is legally separate and publicly traded entity that prepares and publishes its own financial statements [Kim and Hoskisson (1996)]. Second, a lot of variation in the performance would have been lost if firm level excess values had been aggregated into group level excess values. In fact, industry-adjusted performance varies substantially among the firms within a business group [Khanna and Palepu (2000b)].

The regression model is run in the following way:

Excessvalue,, = [[beta].sub.0] + [[beta].sub.1] Group Diversification n = [[beta].sub.2] [Listage.sub.it] + [[beta].sub.3] [Leverage.sub.it] + [[beta].sub.4] [Size.sub.it] + [[beta].sub.5][Growth.sub.it] + [[beta].sub.6][Risk.sub.it] + [[beta].sub.7][Profitability.sub.it] + error [term.sub.it] ... (1)

The impact of group diversification on firm performance may be different for firms affiliated with business groups diversified at different levels. A series of dummy variables are constructed for group diversification variable to examine the performance impacts of various levels of group diversification and thus deciding its functional form. The analyses suggest a non-linear relationship between group diversification and excess value and therefore, the following regression model is run:

[Excessvalue.sub.it] = [[beta].sub.0] + [[beta].sub.1] Group [Diversification.sub.it] = [[beta].sub.2] Group Diversification [conjunction] [3.sub.it] + [[beta].sub.3] Group Diversification[conjunction][3.sub.it] + [[beta].sub.4] Listageit + [[beta].sub.5] [Leverage.sub.it] + [[beta].sub.6][Size.sub.it] + [[beta].sub.7][Growth.sub.it] + [[beta].sub.8][Risk.sub.it] + [[beta].sub.9][Profitability.sub.it] + error [term.sub.it] ... (2)

Further, according to Khanna and Palepu (2000b) and Chang and Hong (2000) there may be distinct differences across different time periods. Therefore, the sample period of 20 years is divided into 4 sub-periods and run the above regressions given in the specification 1 and 2 for each sub-period.

The study uses random effect model to investigate the group diversification-performance relationship due to several reasons. First, one of the crucial problem in estimation is that besides the observable factors like group diversification there may be several unobservable or immeasurable factors (for instance group's value enhancing internal networks) though those may affect the excess value but cannot be directly included in the regression model. The OLS model would suffer from the omitted variable bias as well as it may cause unobservable characteristics to be correlated with the error term, thus may lead the estimation to potentially spurious claims of statistical significance.

In this situation, random effects model is more appropriate because it partly controls for unobservable characteristics assuming that these are randomly distributed across cross-sectional units. Further, the study examines a specification in which it assumes that observations are independent across groups but relaxes the assumption of independence within group [Moulton (1990); Khanna and Palepu (2000)]. Second, the study considers only those firms in the sample that have not experienced any change in the status of affiliation to a diversified group (neither switched from one group to another nor switched from the status of group firm to non-group firm). In this situation, fixed effect model is not appropriate because it cannot capture the effects if the regressors do not vary substantially within the groups [Hsu and Liu (2008); Yin and Zajac (2004)].

4. EMPIRICAL FINDINGS

Table 1 presents the composition of the sample. The statistics show the number of diversified business groups each year included in the sample. The other demographics of the business groups include the average number of firms belong to each business groups every year as well as the minimum and maximum number of KSE listed firms affiliated with each business group every year over the sample period. The statistics depict an interesting trend in the sample composition. The sample data consists 45 business groups having mean (median) number of affiliated firms of 2.756 (2) in 1993. The statistics show a significant increase in number of business groups up to 55 and the average (median) number of firms to 3.218 (3) until 2012.

Panel A of Table 2 reports the comparative figures of mean (median) Excess values for diversified group firms and non-diversified/standalone firms. The statistics clearly demonstrate that both mean (median) Excess values for firms affiliated with diversified business groups are lower than independent non-diversified/standalone firms and the differences are significant at higher levels. The findings reveal that diversified group firms trade at discount when compared with their counterpart nondiversified/standalone firms in Pakistan thus support to Hypothesis lb. Further, Panel B of Table 2 shows that descriptive statistics of the sample. The statistics show the negative mean (median) excess values of-0.05504 (-0.06173) respectively for the sample firms. The mean value of group diversification is 5.43359 indicating the commitment of business groups towards diversification strategies. Similarly, average firm age of 20.20057 years reveals a sound listing exposure of firms in the stock exchange. The statistics of 0.73994 for leverage confirms that Pakistani firms finance larger portion of their assets through debts. Further, firm growth is reasonable high whereas firm profitability is not fairly enough. Finally, the statistics of risk suggests that firms are subject to high level of risk and the energy crisis started in the 2007 may be one the major reason for that firm level risk.

Table 3 depicts the correlation matrix for the principal explanatory variables among sample firms. Variance inflation factor (VIF) test suggests that correlations among the explanatory variables present no serious problem of multicollinearity. (5)

Table 4 reports the OLS regression results for the whole sample period. Model 1 and 2 present the results of specification (1). The coefficient of Group diversification is significantly negative showing that group diversification harms firm value. The results again support Hypothesis lb. Model 2 and 3 gives results of specification (2) suggesting that group diversification-performance relationship is non-linear in Pakistan. The findings clearly show that group diversification-performance relationship is negative-positive-negative. Group diversification initially lowers firm performance but subsequently it started to increase the performance until group diversification reaches at a certain threshold level and finally beyond that level, it again decreases firm performance. The findings partially support the results of Khanna and Palepu (2000a and b).Business groups diversified at lower level might not posses resource based capabilities and skills and further political base to generate benefits to offset the costs of group diversification.

However, agency costs and coordination costs associated with highly diversified business groups are troublesome. The ultimate controllers in these diversified business groups engage in more unrelated diversification and their investments are done primarily to extend control over assets worth more under their control for the growth of their own wealth and they are least concerned with the potential of the investment and maximisation of the overall shareholders' value [La Porta, et al. (1999); Carney, et al. (2011)]. The severe agency conflicts among the controlling shareholders and external shareholders may be the root cause of negative group diversification-performance relationship at most diversified levels [Bertrand, et al. (2002)].

Table 5 demonstrates the estimation results of the specification (1) using cross section random effect Generalised Least Square regression. The panel data analyses confirm the OLS results showing the negative impact of group diversification on Excess value. The results again support to Hypothesis lb. Moreover, the findings corroborate a non-linear relationship between group diversification and firm Excess value. Again, the results of specification (2) reveal negative-positive-negative group diversification-performance relationship.

Table 6 reports OLS regression results showing the impact of group diversification across the sub-periods of 1993-97, 1998-02, 2003-07 and finally 2008-12. The statistics clearly suggest that group diversification discount is ever present in all of the four sub-periods. Consistent with the findings of Khanna and Palepu (2000b) in Chile and Lee, et al. (2008) in South Korea, the study results strongly converge to support the internal market argument that positive performance impacts of group diversification disappear as institutional transitions in capital, product, and labour markets unfold in a post financial reforms era in Pakistan. Moreover, the findings strongly support to tunnelling hypothesis highlighting the burning issue of corporate governance e.g., agency conflicts among ultimate controlling shareholders and external shareholders [Bertrand, et al. (2002)].

Further, the findings suggest that group diversification harms firm value across every sub-period thoroughly 1993-97 period to 2008-12 period. More interestingly, coefficient value of -0.00455 (p<0.01) shown in model 1 declines to -0.00226 (p<0.10) as shown in model 7 for group diversification indicating that group diversification discount significantly falls between the sub-periods of 1993-97 and 2008-12. A decrease in group diversification discount may be due to severe energy crisis in Pakistan started from 2007-08. The findings support risk sharing hypothesis that diversified group firms are better in a position to exploit group resources and extend their capability to overcome such disastrous problem faced by group firms [Khanna and Palepu (2000b); Khanna and Yafeh (2005)].

Table 7 reports the results of panel data analyses. The findings confirm the above OLS results. Group diversification is consistently negatively related to excess value in all of the four sub-period samples and the results are significant at conventional levels except for 2003-07 sub-period sample. The findings again support to market failure theory and agency theory.

5. SUMMARY AND CONCLUSION

Diversified business groups are well pronounced in the business environment and possess a chunk of corporate assets of Pakistan. These business groups flourished aggressively during 1950's and 1960s due to government policy distortion and market failures. In early 1990s, financial reforms and liberalisation programmes were initiated and group diversification-performance relationship is expected to evolve differently. In Pakistani context, this is the pioneering study employing a well known 'Chop Shop' methodology proposed by Berger and Ofek (1995) and is adopted in earlier studies of group diversification-performance relationships, for instance Ferris (2003); Lee, Peng and Lee (2008) among others. The present study fills that gap and attempts answering "Is there group diversification premium or discount present in Pakistan". This study extends and supports the institution-based theory of corporate diversification by adding a dynamic, longitudinal, and temporal component. The study covers 20 years period divided into four sub-periods to examine the dynamics of the relationships.

The results of the whole sample period and sub-period samples confirm that group diversification discount is ever present in Pakistan. Group diversification is harmful for firm value. Further, group diversification-performance relationship is negative-positive-negative in Pakistan. The negative-positive-negative group diversification-performance relationship postulates that group diversification strategy is harmful in the changed institutional setting in Pakistan. At the initial level of group diversification, it decreases firm performance because group level resources base including skills, information, product markets and political clout is not enough to generate benefits sufficient to offset the group diversification costs [Khanna and Palepu (2000b)]. However, group diversification started to increase firm performance until it reaches at a certain threshold level. Beyond that threshold level, it' again started to decrease firm performance.

The negative impact of group diversification on firm performance is consistent with the tunneling hypothesis. The findings suggest that ultimate controllers in business groups pursue diversification strategies merely for extending their ultimate control over the firms simultaneously with least cash flow rights. They use channel of investment as a device of controlling other firms under the umbrella of the business group. Besides direct shareholdings, cross-shareholdings and pyramidal structures, cross-directorate-ship interlocking are the tools used by the group members to achieve their ultimate control in excess of their cash flow rights. Most importantly, the general public generally does not participate in the corporate voting in Pakistan which further benefits them in getting control over the firm with little direct or indirect shareholdings. The present study provides empirical evidence of an important emerging country and will extend support to existing literature in the fields of corporate finance and strategy. The findings shed light on an important corporate governance issue of group diversification that causes serious agency conflicts among the ultimate controlling shareholders and minority shareholders. The study stress the need for tightening corporate governance measures and their implementation by the regulatory bodies discouraging the control enhancing mechanism keeping in view that benefits should flow to the investors proportionate to their shareholdings.

The study is restricted to non-financial sector and excluding the financial sector firms. Some other sources of costs and benefits to business groups for instance internationalisation strategy, financial constraints, etc. are required to be investigated in future. Further, the study focuses group firms and it is necessary to examine the dynamic relationships within business groups. Most importantly, business groups fall into severe agency conflicts among controlling shareholders and external shareholders that require attention in future research.

Waseem Ullah <waseem.ullah81@gmail.com> is Ph.D (scholar) at Capital University of Science and Technology, Islamabad. Arshad Hasan <arshad@cust.edu.pk> is Dean and Associate Professor at Capital University of Science and Technology, Islamabad.

REFERENCES

Barney, J. B. (1991) Firm Resources and Sustained Competitive Advantage. Journal of Management 17:1, 99-129.

Bebchuk, L., R. Kraakman, and G. Triantis (2000) Stock Pyramids, Cross-Ownership, and Dual Class Equity: The Creation and Agency Costs of Separating Control from Cash Flow Rights. In Morck and K. Randall (ed.) Concentrated Corporate Ownership. The University of Chicago Press.

Berger, P. and E. Ofek (1995) Diversification's Effect on Firm Value. Journal of Financial Economics 37:1, 39-65.

Bertrand, M., P. Mehta, and S. Mullainathan (2002) Ferreting Out Tunneling: An Application to Indian Business Groups. Quarterly Journal of Economics 117:1, 121-48.

Carney, M., D. Shapiro, and Y. Tang (2009) Business Group Performance in China: Ownership and Temporal Considerations. Management and Organisation Review 5, 167-193.

Carney, M., E. R. Gedajlovic, Heugens, and M. V. Essen (2011) Business Group Affiliation, Performance, Context, and Strategy: A Meta-Analysis. http://works.bepress.eom/marc_vanessen/6.

Chakrabarti, A., K. Singh, and I. Mahmood (2007) Diversification and Performance: Evidence from East Asian Firms. Strategic Management Journal 28, 101-120.

Chang, S. J. and J. Hong (2000) Economic Performance of Group-Affiliated Companies in Korea: Intra-group Resource Sharing and Internal Business Transactions. Academy of Management Journal 43:3, 429-448.

Chang, S. J. and U. Choi (1988) Strategy, Structure and Performance of Korean Business Groups: A Transactions Cost Approach. Journal of Industrial Economics 37:2, 141-158.

Chu, W. (2004) Are Group-Affiliated Firms Really More Profitable than Nonaffiliated? Small Business Economics 22:5, 391-405.

Dow, S. and J. McGuire (2009) Propping and Tunneling: Empirical Evidence from Japanese Keiretsu .Journal of Banking and Finance 33:10, 1817-1828.

Estrin, S., S. Poukliakova, and D. Shapiro (2009) The Performance Effects of Business Groups in Russia. Journal of Management Studies 46:3, 393-420.

Ferris, S. P., K. A. Kim, and P. Kitsabunnarat (2003) The Costs (and Benefits?) of Diversified Business Groups: The Case of Korean Chaebols. Journal of Banking and Finance 27:2, 251-273.

Friedman, E., S. Johnson, and T. Mitton (2003) Propping and Tunneling. Journal of Comparative Economics 31, 732-750.

George, R. and R. Kabir (2008) Corporate Diversification and Firm Performance: How Does Business Group Affiliation Matter? [Online] Available: https://ideas.repec.org/r/fma/fmanag/lins02.

Ghani, W. I., O. Haroon, and J. Ashraf (2011) Business Groups' Financial Performance: Evidence from Pakistan. Global Journal of Business Research 5:2, 27-39.

Gohar R. and S. Karacaer (2009) Pakistani Business Groups: A Comparison of Group Affiliated and Unaffiliated Firm Performance. NUST Journal of Business and Economics 2:2, 41-53.

Granovetter, M. (1994) Business Groups. In J. N. Smelser, and R. Swedberg, (eds.) The Handbook of Economic Sociology. Princeton University Press, USA.

Guest, P. and D. Sutherland (2010) The Impact of Business Group Affiliation on Performance: Evidence from China's "National Champions". Cambridge Journal of Economics 34,617-631.

Guillen, M. F. (2000) Business Groups in Emerging Economies: A Resource Based View. Academy of Management Journal 43, 362-380.

He, J., X. Mao, O. M. Rui, and X. Zha (2013) Business Groups in China. Journal of Corporate Finance 22:1, 166-192.

Hsu, C. and H. Liu (2008) Corporate Diversification and Firm Performance: The Moderating Role of Contractual Manufacturing Model. Asia Pacific Management Review 13:1,345-360.

Ikram, A. and S. A. A. Naqvi (2005) Family Business Groups and Tunneling Framework: Application and Evidence from Pakistan. Lahore University of Management Sciences. (CMER Working Paper No. 05-41).

Joh, S. (2003) Corporate Governance and Firm Profitability: Evidence from Korea before the Economic Crisis. Journal of Financial Economics 68:2, 287-322.

Keister, L. A. (2000) Chinese Business Groups: The Structure and Impact of Inter-Firm Relations during Economic Development. New York: Oxford University Press.

Khanna, T. and J. W. Rivkin (2001) Estimating the Performance Effects of Business Groups in Emerging Markets. Strategic Management Journal 22:1, 45-74.

Khanna, T. and K. Palepu (1997) Why Focused Strategies may be Wrong for Emerging Markets. Harvard Business Review 75:4, 41-51.

Khanna, T. and K. Palepu (2000a) Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups. Journal of Finance 55 2 867-891.

Khanna, T. and K. Palepu (2000b) The Future of Business Groups in Emerging Markets: Long-run Evidence from Chile. Academy of Management Journals, 268-285.

Khanna, T. and Y. Yafeh (2005) Business Groups and Risk Sharing around the World. Journal of Business 78:1, 301-340.

Kim, H. and H. Hoskisson (1996) Japanese Governance Systems: A Critical Review. In S. B. Parasad (ed.) Advances in International Comparative Management 11, 65-190. Greenwich, CT: JAI Press.

Kim, H, R. E Hoskisson, and W. P. Wan (2004) Power Dependence, Diversification Strategy, and Performance in Keiretsu Member Firms. Strategic Management Journal 25:7, 613-636.

La Porta, R., Lopez-de-Silanes, S. A. Florencio, and R. W. Vishny (1999) Corporate Ownership around the World. Journal of Finance 54:2, 471-517.

Lang, L. H. P. and R. M. Stulz (1994) Tobin's q, Corporate Diversification and Firm Performance. Journal of Political Economy 102:6, 1248-1280.

Lee, K. (2002) Business Groups as an Organisational Device for Development and Transition. [Online] Available:http://project.iss.u-tokyo.ac.jp/nakagawa/members/papers/3(5)lee.final.pdf

Lee, K., K. Ryu, and J. Yoon (2002b) Corporate Governance and Long Term Performance of the Business Groups: The Case of Chaebols in Korea. Centre for Economic Institutions. (Working Paper Series No. 2004-3).

Lee, K., M. W. Peng, and K. Lee (2008) From Diversification Premium to Diversification Discount during Institutional Transitions. Journal of World Business 43:1, 47-65.

Leff, N. H. (1978) Industrial Organisation and Entrepreneurship in the Developing Countries: The Economic Groups. Economic Development and Cultural Change 26 4 661-675.

Lewellen, W. G. (1971) A Pure Financial Rationale for the Conglomerate Merger. Journal of Finance 26, 521-537.

Lins, K. V. and H. Servaes (2002) Is Corporate Diversification Beneficial in Emerging Markets? Financial Management 31:1, 5-31.

Morck, R. and B. Yeung (2003) Agency Problems in Large Family Business Groups. Entrepreneurship Theory and Practice 27, 367-383.

Purkayastha, S. (2009) Diversification and Performance: A Study of Indian Manufacturing Firms. Unpublished PhD. Thesis. ICFAI University, Dehradun.

Purkayastha, S. (2013) Impact of Macro-economic Environment on Diversification-performance Relationship: A Cross Country Study of India and Japan. Indian Council for Research on International Economic Relations.

Shahid-ur-Rehman (1998) Who Owns Pakistan. Islamabad: Mr. Books (Pvt.) Ltd.

Wernerfeit, B. and C. Montgomery (1988) Tobin's Q and the Importance of Focus in Firm Performance. American Economic Review 78:1, 246-250.

Yin, X. and E. J. Zajac (2004) The Strategy/Governance Structure Fit Relationship: Theory and Evidence in Franchising Arrangements. Strategic Management Journal, 25, 365-383.

Yiu, D., G. D. Bruton, and Y. Lu (2005) Understanding Business Group Performance in an Emerging Economy: Acquiring Resources and Capabilities in Order to Prosper, Journal of Management Studies 42:1, 183-206.

(2) There is no source compiling and providing ownership data and information regarding the group affiliated firms and group diversification in Pakistan. For our research purposes, we construct database by obtaining valuable information required for the study. Ownership data is collected from the statements of pattern of shareholdings in annual reports of firms. Accounting variables' information is available in the publications of the State Bank of Pakistan 'Balance sheet analysis of joint stock companies listed at Karachi Stock Exchange'. Group control is determined by examining the pattern of shareholdings statements, board of directors and firm's management information, scanning a book "Who Own Pakistan" written by Shahid-ur-Rehman (1998), website of Business council of Pakistan and other relevant information from the websites and annual reports of the individual firms. Further, stock market data is collected from the website of Business Recorder' and the 'Business Recorder' newspaper.

(3) Following Berger and Ofek (1995) and Lee, et al. (2008) industry median is derived from the sample of standalone firms.

(4) In order to eliminate the firms with extreme excess values, the study follows Ferris, et al. (2003) and Lee, et al. (2008). Those firms with actual value more than four times the firm's imputed value or one-fourth of the imputed value are excluded.

(5) For brevity, the statistics of Variance inflation factor are not reported and these can be provided if demanded.

List of Variables

Variable          Definition

Group             The study employs a continuous measure of group
Diversification   diversification. Group diversification represents
                  number of listed firms belong to a diversified
                  business group [Lee, Peng, and Lee (2008)].

List Age          Once a firm is listed on stock exchange,
                  it requires sufficient time to be familiar with
                  the operations of the stock exchange. The study
                  controls firm's listing exposure measured as
                  number of years since a firm is listed on stock
                  exchange till 2012. The natural log of listing
                  years is taken [Guest, et al. (2010)].

Leverage          The study introduces leverage defined as firm's
                  total debts/total assets as a proxy for capital
                  structure [He, et al. (2013)].

Size              The natural log of firm total assets is taken
                  as a measure of firm size [Carney, Shapiro,
                  and Tang (2008)].

Growth            Usually, firms enjoy superior performance
                  in relatively fast growing markets. In order
                  to control for demand conditions and product-cycle
                  effects, the study take growth variable measured
                  as percentage change in sales from previous year
                  [Carney, Shapiro, and Tang (2008)].

Risk              Standard deviation of return on capital employed.

Industry          Under some conditions, industry effect may be an
Fixed Effects     influential factor in affecting firm performance.
                  Therefore, the study includes industry dummies to
                  control for fixed effects for industry
                  [Khanna and Palepu (2000b)].

Table 1
Sample Composition

       No. of Business   Avg no. of   Median no.
Year       Groups          Firms       of Firms

1993         45           2.75600         2
1994         45           2.77778         2
1995         45           2.62222         2
1996         46           2.71739         2
1997         45           2.93333         2
1998         46           2.91304         2
1999         47           2.87234         2
2000         47           2.91489         2
2001         56           3.50000         3
2002         56           3.50000         3
2003         56           3.48214         3
2004         56           3.42857         3
2005         56           3.39286         3
2006         56           3.41071         3
2007         56           3.37500         3
2008         56           3.35714         3
2009         56           3.35714         3
2010         56           3.35714         3
2011         55           3.30909         3
2012         55           3.21818         3

       Min no. of   Max no. of
Year     Firms        Firms

1993       1            10
1994       1            10
1995       1            9
1996       1            9
1997       1            10
1998       1            10
1999       1            10
2000       1            10
2001       1            13
2002       1            13
2003       1            13
2004       1            13
2005       1            13
2006       1            13
2007       1            13
2008       1            13
2009       1            13
2010       1            13
2011       1            12
2012       1            12

Table 2
Panel A

Univariate Analyses

                                     Whole Period 1993-2012

Variables   Firm              Mean           Median         St. Dev.

Excess      Diversified       -0.08404       -0.09606       0.25501
Value       group firms

            Non-diversified   -0.01411 ***   -0.01000 ***   0.24723
            firms

            All               -0.05504       -0.06173       0.25405

T-test is used for comparison of means, and Wilcoxon
signed-rank test is used for comparison of medians. ***,
** and * denote significance of differences at 1, 5 and
10 percent levels, respectively.

Panel B
Descriptive Statistics

Variable            Mean      Median     Maximum

Excess Value      -0.05504   -0.06173    0.60179

Group
Diversification   5.43359     3.00000    22.00000
List Age          20.20057   17.00000    66.00000
Leverage          0.73994     0.68158    4.52265
Size              6.66468     6.61386    12.24441
Growth            0.17455     0.08567    3.98905
Risk              0.17658     0.05427    2.99618
Profitability     0.00707     0.01292    0.92059

Variable          Minimum    Std. Dev.

Excess Value      -0.60033    0.25405

Group
Diversification   1.00000     5.95150
List Age          1.00000    13.05658
Leverage          0.04554     0.46656
Size              1.60944     1.48542
Growth            -0.99360    0.53020
Risk              0.00000     0.44534
Profitability     -0.95189    0.13410

Table 3
Correlation

                               Group
                   Excess    Diversifi-
Variable           value       cation     List age   Leverage

Excess value         1
Group
Diversification   -0.05801       1
                  0.00000        --
List age          -0.03221    0.11968        1
                  0.02420     0.00000        --
Leverage          0.30683     -0.06793    -0.01383      1
                  0.00000     0.00000     0.33300       --
Size              0.00216     0.26304     0.14996    -0.22387
                  0.87970     0.00000     0.00000    0.00000
Growth            -0.05233    0.01122     -0.00221   0.01783
                  0.00020     0.43210     0.87730    0.21200
Risk              0.10583     -0.05214    0.01102    0.23787
                  0.00000     0.00030     0.44060    0.00000
Profitability     -0.23119    0.07174     0.05047    -0.28665
                  0.00000     0.00000     0.00040    0.00000

                                                   Profit-
Variable            Size      Growth      Risk     ability

Excess value
Group
Diversification
List age
Leverage
Size                 1
                     --
Growth            0.03260       1
                  0.02250       --
Risk              -0.16209   -0.01442      1
                  0.00000    0.31300       --
Profitability     0.13330    0.11685    -0.11037      1
                  0.00000    0.00000    0.00000      --

All correlations greater than or equal
to 0.10 are significant at 1 percent level.

Table 4
OLS Regression Results- Whole Period of 1993-2012

                           Whole Period of 1993-2012

Variable                       (1)            (2)

Group Diversification     -0.00218 ***    -0.00191 ***
                             0.00020        0.00110
Group Diversification^2
Group Diversifications
List Age                   -0.00062 **    -0.00066 **
                             0.01980        0.01220
Leverage                   0.14998 ***    0.15710 ***
                             0.00000        0.00000
Size                       0.01880 ***    0.01896 ***
                             0.00000        0.00000
Growth                    -0.02010 ***    -0.01980 ***
                             0.00180        0.00170
Risk                       0.02190 ***    0.02187 ***
                             0.00560        0.00450
Profitability             -0.28890 ***    -0.29313 ***
                             0.00000        0.00000
Intercept                 -0.26535 ***    -0.22176 ***
                             0.00000        0.00000
No. of Observations           4901            4901
No. of Firms                   367            367
Industry Dummies               No             Yes
Adjusted R-squared           0.12899        0.17468
F-statistics              104.66560 ***   55.58446 ***

                           Whole Period of 1993-2012

Variable                      (3)            (4)

Group Diversification     -0.04993 ***   -0.04482 ***
                            0.00000        0.00000
Group Diversification^2   0.00593 ***    0.00545 ***
                            0.00000        0.00000
Group Diversification^3   -0.00018 ***   -0.00017 ***
                            0.00000        0.00000
List Age                  -0.00053 **    -0.00054 **
                            0.04220        0.03920
Leverage                  0.14782 ***    0.15415 ***
                            0.00000        0.00000
Size                      0.01883 ***    0.01840 ***
                            0.00000        0.00000
Growth                    -0.02105 ***   -0.02034 ***
                            0.00100        0.00110
Risk                      0.01925 ***    0.01961 ***
                            0.01400        0.01040
Profitability             -0.27934 ***   -0.28128 ***
                            0.00000        0.00000
Intercept                 -0.20336 ***   -0.14990 ***
                            0.00000        0.00000
No. of Observations           4901           4901
No. of Firms                  367            367
Industry Dummies               No            Yes
Adjusted R-squared          0.14406        0.18652
F-statistics              92.63031 ***   54.50173 ***

***, ** and * represent significance
of results at 1, 5 and 10 percent level.

Table 5
Cross Section Random-Effect Generalised Least Square-Whole
Period of 1993-2012

                            Whole Period 1993-2012

Variable                      (1)            (2)

Group Diversification     -0.00323 **    -0.05454 ***
                            0.02310        0.00000
Group Diversification^2                  0.00625 ***
                                           0.00010
Group Diversification^3                  -0.00019 ***
                                           0.00010
List Age                  -0.00236 ***   -0.00227 ***
                            0.00000        0.00000
Leverage                  0.16894 ***    0.16791 ***
                            0.00000        0.00000
Size                      0.04079 ***    0.04053 ***
                            0.00000        0.00000
Growth                    -0.03514 ***   -0.03508 ***
                            0.00000        0.00000
Risk                       0.01380 **     0.01337 **
                            0.03820        0.04460
Profitability             -0.25452 ***   -0.25320 ***
                            0.00000        0.00000
Intercept                 -0.37493 ***   -0.29042 ***
                            0.00000        0.00000
No. of Observations           4901           4901
No. of Firms                  367            367
Industry Dummies              Yes            Yes
Adjusted R-squared          0.13620        0.13873
F-statistics                41.66490       38.58399
Rho                         0.39470        0.38770
Chi-square                91.73642 ***   91.70038 ***

** and * represent significance of results
at 1, 5 and 10 percent level.

Table 6
OLS Regression Results-Sub-Period Analyses

                               1993-97

Variable                 (1)            (2)

Group
Diversification      -0.00455 ***    -0.00270 *
                       0.00200        0.05530
List age             -0.00281 ***   -0.00282 ***
                       0.00000        0.00000
Leverage             0.12729 ***    0,14879 ***
                       0.00000        0.00000
Size                 0.02795 ***       0.008
                       0.00000        0.31270
Growth                  -0.009         -0.007
                       0.58530        0.64120
Risk                    0.019          0.016
                       0.35580        0.40770
Profitability        -0.15861 **    -0.23109 ***
                       0.03580        0.00120
intercept            -0.25223 ***    0.17240 **
                       0.00000        0.01340
No. of Observations      935            935
No. of Firms             238            238
Industry Dummies          No            Yes
Adjusted R-squared      0.088          0.228
F-stats              13.90190 ***   16,32962 ***

                              1998-02

Variable                 (3)            (4)

Group
Diversification      -0.00273 **    -0.00261 **
                       0.01980        0.02410
List age             -0.00146 ***   -0.00173 ***
                       0.00790        0,00150
Leverage             0.20047 ***    0.21305 ***
                       0.00000        0.00000
Size                 0.02501 ***    0.01865 ***
                       0.00000        0.00140
Growth                  -0.013         -0.01
                       0.31780        0.40760
Risk                    0.013          0.012
                       0.36770        0.38640
Profitability        -0.42545 ***   -0.39539 ***
                       0.00000        0.00000
intercept            -0.31616 ***   -0.15601 ***
                       0.00000         0.0070
No. of Observations      1178           1178
No. of Firms             332            332
Industry Dummies          No            Yes
Adjusted R-squared      0.213          0.273
F-stats              46,41853 ***   24.24267 ***

                              2003-07

Variable                 (5)            (6)

Group
Diversification         -0,001        -0.00044
                       0,31680        0.67050
List age               -0.00041       -0.00057
                       0.40140        0.24840
Leverage             0.16436 ***    0.17607 ***
                       0.00000        0.00000
Size                 0.02188 ***    0.02937 ***
                       0.00000        0.00000
Growth                  -0.014       -0.01719 *
                       0.20720        0.10050
Risk                    0.022        0.02458 *
                       0.12070        0.06800
Profitability        -0.24686 ***   -0.24159 ***
                       0.00000        0.00000
intercept            -0.30426 ***   -0.42668 ***
                       0.00000        0.00000
No. of Observations      1477           1477
No. of Firms             328            328
Industry Dummies          No            Yes
Adjusted R-squared      0.131           0.2
F-stats              32.76280 ***   20.44169 ***

                              2008-12

Variable                 (7)            (8)

Group
Diversification       -0.00226 *     -0.00209 *
                       0.05160        0.06590
List age             0.00246 ***    0.00238 ***
                       0.00000        0.00000
Leverage             0.12723 ***    0.13939 ***
                       0.00000        0.00000
Size                 0.01403 ***    0.02132 ***
                       0.00210        0.00000
Growth               -0.04502 ***   -0.04648 ***
                       0.00000        0.00000
Risk                  0.03243 **     0.02631 *
                       0.05020        0.10320
Profitability        -0.27184 ***   -0.30755 ***
                       0.00000        0.00000
intercept            -0.30787 ***   -0.45518 ***
                       0.00000        0.00000
No. of Observations      1311           1311
No. of Firms             308            308
Industry Dummies          No            Yes
Adjusted R-squared      0,134          0.191
F-stats              29.92234 ***   17.23459 ***

***, ** and * represent significance of results
at 1, 5 and 10 percent level respectively.

Table 7
Cross Section Random-Effect Generalised
Least Square- Sub-Period Analyses

                            Sub-period Samples

                          1993-97        1998-02
Variable                    (1)            (2)

Group Diversification    -0.00456 *    -0.00391 **
                          0.05460        0.03700
List Age                -0.00387 ***   -0.00195 **
                          0.00030        0.01930
Leverage                0.15272 ***    0.21384 ***
                          0.00000        0.00000
Size                    0.03656 ***    0.03063 ***
                          0.00210        0.00050
Growth                  -0.05428 ***   -0.04715 ***
                          0.00000        0.00000
Risk                    0.04709 ***      0.01176
                          0.00190        0.29010
Profitability           -0.31538 ***   -0.31697 ***
                          0.00000        0.00000
Intercept                 0.00625      -0.20910 ***
                          0.95280        0.01030
No. of Observations         935            1178
No. of Firms                238            332
Industry Dummies            Yes            Yes
Adjusted R-squared        0.17821        0.22791
F-statistic               12.25254       19.28567
Rho                       0.63720        0.62200
Chi-square              65.80821 ***   45.24053 ***

                            Sub-period Samples

                          2003-07        2008-12
Variable                    (3)            (4)

Group Diversification     -0.00108     -0.00394 **
                          0.54910        0.04980
List Age                  -0.00079     0.00296 ***
                          0.34050        0.00160
Leverage                0.19954 ***    0.13826 ***
                          0.00000        0.00000
Size                    0.03818 ***    0.03450 ***
                          0.00000        0.00000
Growth                  -0.04310 ***   -0.04834 ***
                          0.00000        0.00000
Risk                      0.01398        0.01293
                          0.21050        0.29290
Profitability           -0.23973 ***   -0.19168 ***
                          0.00000        0.00000
Intercept               -0.50990 ***   -0.57599 ***
                          0.00000        0.00000
No. of Observations         1477           1311
No. of Firms                328            308
Industry Dummies            Yes            Yes
Adjusted R-squared        0.16228        0.13167
F-statistic               16.04820       11.45510
Rho                       0.59650        0.62230
Chi-square              36.28483 ***   46.10645 ***

***, ** and * represent significance of results
at 1, 5 and 10 percent level respectively.