Business of caste and religion in India

Abstract

Social interactions are characterized by cultural homophily.1 A growing literature shows that cultural proximity among members of a group impacts economic outcomes, although the direction of this impact is not always the same.2 However, previous studies have examined such proximity among coarse groups, such as gender, race, and ethnicity.3 In this paper, we examine whether and to what extent two cultural factors, religion and caste (a traditional institution that divides Hindu society in India into thousands of hierarchical groups, in uence large public and private firms in India. In particular, we ask: Do directors on corporate boards tend to be culturally proximate even along these narrowly defined groups? and How does this cultural proximity impact firm outcomes? We find that boards of directors overwhelmingly belong to the same cultural group even when it is narrowly defined along caste, with little decline in this within-board homogeneity during 1999-2012. This has a perverse effect on firm outcomes, with higher religion or caste homophily on boards causing firms to witness lower protability and operating performance. To the best of our knowledge, we are the first to show that traditional cultural institutions shape corporate board composition and have a detrimental impact on firm outcomes.