Business Group Affiliation, Firm Governance, and Firm Performance: Evidence from China and India Deeksha A. Singh* and Ajai S. Gaur ABSTRACT Manuscript Type: Empirical Research Question/Issue: This study seeks to understand how business group affiliation, within firm governance and external governance environment affect firm performance in emerging economies. We examine two aspects of within firm governance – ownership concentration and board independence. Research Findings/Insights: Using archival data on the top 500 Indian and Chinese firms from multiple data sources for 2007, we found that group affiliated firms performed worse than unaffiliated firms, and the negative relationship was stronger in the case of Indian firms than for Chinese firms. We also found that ownership concentration had a positive effect on firm performance, while board independence had a negative effect on firm performance. Further, we found that group affiliation – firm performance relationship in a given country context was moderated by ownership concentration. Theoretical/Academic Implications: This study utilizes an integration of agency theory with an institutional perspective, providing a more comprehensive framework to analyze the CG problems, particularly in the emerging economy firms. Empirically, our findings support, as well as contradict, some of the conventional wisdom, and suggest useful avenues for future research. Practitioner/Policy Implications: This study shows that reforms in general and CG reforms in particular are effective in emerging economies, which is an encouraging sign for policy makers. However, our research also suggests that it may be time for India and China to stop the encouragement for the empire building through group formation in the corporate world. For practioners, our findings suggest that firms need to balance the need for oversight with the need for advice, while selecting independent directors. Keywords: Corporate Governance, Ownership Concentration, Board Independence, China, India INTRODUCTION W ith an increasing integration of world economies and the growth of large organizations, corporate gover- nance (CG) has emerged as an important issue for scholars as well as managers all over the world. Using agency theory as the dominant theoretical paradigm, the extant literature has mainly focused on the efficacy of various governance mechanisms that protect the shareholders from self serving managers (Rajagopalan & Zhang, 2008). Much of this research is situated in the context of developed economies, where the external governance environment and institutions to support the internal firm governance are stable and well developed (Judge, Douglas, & Kutan, 2008). While a focus on within firm governance mechanisms has advanced our understanding of the links between gover- nance standards and firm performance, there is an increas- ing realization that the efficacy of within firm governance may be dependent on the quality of external governance and institutions (Judge et al., 2008). This issue is particularly important for emerging economies, which often lack the institutions needed to support efficient within firm gover- nance (Peng, 2003). It is well documented that many emerg- ing economies, such as India and China, do not have well developed external control mechanisms, such as a market for corporate control, merger, and acquisition laws, and effi- cient law enforcement (Khanna & Palepu, 2000a; Peng, 2003). This not only makes it more difficult to govern the organi- zations, but also makes standard CG practices less legitimate (Judge et al., 2008). *Address for correspondence: Department of Business Policy, National University of Singapore, Singapore, 117592. Tel: 1-757-401-5963; E-mail: deeksha@nus.edu.sg 411 Corporate Governance: An International Review, 2009, 17(4): 411–425 © 2009 Blackwell Publishing Ltd doi:10.1111/j.1467-8683.2009.00750.x