Group affiliation, economic policy uncertainty and corporate risk-taking behavior: evidence from emerging economies

Purpose This study examines the effect of business group affiliation on the relationship between economic policy uncertainty (EPU) and corporate risk-taking (CRT) behavior for a panel of Indian firms. Design/methodology/approach The study focuses on a panel data set consisting of annual observations for a sample of 462 firms spanning 2012–2019. We estimated all equations using fixed effects. In addition, this study uses India VIX as an alternative proxy for measuring uncertainty. Further, the study employs propensity score matching and uses system-GMM for robustness checks. Findings Using two alternative proxy measures for CRT, the study finds risk-taking behavior is negatively associated with EPU for independent firms. However, results for group-affiliated firms are observed to be insignificant. The results affirm that group affiliation plays an important role in mitigating the impact of EPU on CRT behavior. Originality/value Extant literature uses firm-specific variables to define financial constraints. In contrast, this study builds on the context of Indian firms representing a unique opportunity to exploit a natural experiment for the exploration of risk-taking behavior and policy uncertainty given financial constraints.