Home / Companies / News /  Caste biases rife even in M&A deals in India, shows an IIM-B study
Back

Caste biases rife even in M&A deals in India, shows an IIM-B study

M&A deals are more likely to happen between firms whose boards are dominated by the same caste, finds a new study. (iStockphoto)Premium
M&A deals are more likely to happen between firms whose boards are dominated by the same caste, finds a new study. (iStockphoto)

  • Company boards dominated by directors of the same caste tend to enter deals more often, shows an IIM-B study
  • These companies perform slightly worse in terms of returns than those who do not enter into same-caste deals

New Delhi: The caste system pervades all spheres of Indian society. Caste biases still influence many aspects of the economy but the private corporate sector is generally perceived as an oasis of meritocracy and economic efficiency.

However, a new study by Manaswini Bhalla and others from the Indian Institute for Management, Bangalore, and Pomona College, Claremont, California, shows that caste affiliations remain critical in corporate offices and especially in mergers and acquisitions (M&As). The authors find that M&A deal decisions are driven by caste proximity.

In addition, they find that these caste-influenced deals also lead to investment decisions that are sub-optimal in terms of post-M&A company performance.

To show this, the authors developed a new database of M&A deals in India from 2007 to 2017 by combining data from two corporate databases (Thomson One SDC and CMIE Prowess), which contain information on corporate directors and company finances.

The caste of directors is identified using their last names in a caste-mapping method developed in another study.

The authors find that company boards dominated by directors of the same caste tend to enter deals more often.

Further, when the merged companies’ performance is considered one or two years after the deal, the authors find that these companies perform slightly worse in terms of returns than those who do not enter into same-caste deals.

The authors suggest that caste affinity may serve as an informal channel of information for directors as they make critical investment decisions in the absence of comprehensive information. However, considering that this cultural proximity does not lead to greater efficiency, these biases need to be re-examined, the authors argue.

READ | Firms of a Feather Merge Together: Cultural Proximity and Firms Outcome

Catch all the Corporate news and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less

Recommended For You

Trending Stocks

×
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout