Does crude oil price volatility affect risk-taking capability in business group firms: evidence from India?

Abstract

Purpose

The study tests risk-taking and risk-aversion capabilities while distinguishing between business group firms and stand-alone firms and considering oil price volatility. Second, this attempt to study the linkage between risk-taking during market down movements and when the firms have established themselves as product market leaders. Third, this study analyses the “sentiment” state, where it explores the reaction of corporations when the market is in the negative direction, and lastly, it explores the linkage between product market competition and risk-aversion.

Design/methodology/approach

This study uses financial information for 1,273 non-financial companies and other required data from various sources. The study employs panel data and utilizes different empirical methodologies, including the generalized method of moments (GMM) estimator, to test the stated hypotheses.

Findings

We find that the business group firms have more risk-taking proficiencies compared with the stand-alone firms. Moreover, this study discovers that the corporates avoid taking risks when the market is not performing well. Also, when the market is down and crude prices are high, the management expects high earnings in the future, willingly takes risks and shows that product market leaders do not follow the risk-aversion strategy.

Practical implications

The empirical results indicate that oil price movement can restrict management’s behaviour when choosing a risky investment project. Management should develop a robust policy that follows the group of firms. In the policy, the management should describe the level of risk that may be taken by the firm and implement it when required.

Originality/value

Since we do not find any studies in this context, then there is a major and essential gap in the literature that this study should fill.

Citation

Tripathi, N.N., Tiwari, A.K., Hammoudeh, S. and Kumar, A. (2024), "Does crude oil price volatility affect risk-taking capability in business group firms: evidence from India?", International Journal of Managerial Finance, Vol. 20 No. 5, pp. 1368-1397. https://doi.org/10.1108/IJMF-10-2023-0486