Propping: New Share Issues Of Pakistani Business Group Firms

2725 words - 11 pages

In emerging market business groups could facilitate efficient allocation of capital and dominate economic activities (Bea, Kang, & Kim, 2002). Business groups consist of legally independent firms that may be interrelated by social ties and mostly owned by small group of shareholders called in many cases a family. In a pyramid, the ultimate owner uses indirect ownership to control large groups of companies because of chain of ownership in pyramid structure (Bertrand & Mullainathan, 2003). A pyramidal type of ownership structure within business groups allows families being at the top of such a pyramid to control firms in the group.
In particular, we analyze the nature of new share issues of Pakistan firms, focusing on patterns of cash rights by affiliated and non-affiliated firms during the period 2001–2007. In Section 2, we present a brief review of the literature on propping. Section 3 elaborates on the data and methodology. Section 4, we present the empirical findings, after which we summarize the findings and discuss the conclusions in Section 5.
Objectives of the Study
The objectives of the study are as follows:
1) To what extend propping exist in Pakistani Business Groups.
2) To investigate, if propping occurs in business groups then the performance of affiliated Business will be higher than the non-affiliated business.
In this article we focus on examining up to what extent propping takes place in the context of Pakistani business groups. In propping funds are transferred from profitable business group firms to those who are in distress (Friedman, Johnson & Mitton, 2003). According to literature there is no study conducted on this phenomena of propping in Pakistan. Propping is a new concept in the context of Pakistani business Groups. Pakistan provides an interesting case to analyze such phenomena; because Pakistan groups in many cases have a pyramidal structure. At the same time, however, the extent to which propping takes place in the case of Pakistan has not been investigated in the literature.

Literature Review
In emerging economies, the investors could overcome the weak legal protection by taking advantage of their group structure through connected transactions. Controlling shareholders could choose between tunneling and propping depending on the magnitude of benefit (Peng, Wei, & Yang, 2006). The ownership structures in United States are simple in which they own other firms as subsidiary (Bertrand & Mullainathan, 2003). They also suggested that in tunneling the ownership and control separation in a pyramid generates high incentives and benefits for the ultimate owner to divert resources among firms. In a family of businesses a single shareholder completely controls several independent traded firms (Bertrand, Mehta, & Mullainathan, 2002). According to the Bae, Kang, and Kim (2002) study founded that in not well developed market a group could add value and facilitate...

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