for helpful comments. Funding for Gordon Phillips was provided through NSF Grant #0823319. All errors are the authors alone. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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We propose a novel identification strategy for estimating the effects of business group affiliation. We study two-firm business groups, some of which split up during the sample period, leaving some firms as stand-alone firms. We instrument for stand-alone status using shocks to the industry of the other group firm. We find that firms that become stand-alone reduce leverage and investment. Consistent with collateral cross-pledging, the effects are more pronounced when the other firm had high tangibility. Consistent with capital misallocation in groups, the reduction in leverage is stronger in firms that had low (high) profitability (leverage) relative to industry peers. Received July 3, 2017; editorial decision April 7, 2018 by Editor Wei Jiang. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

The relational contracts literature suggests that a principal can improve contract self-enforceability by specifying initial requirements that increase the agent's ex-post rents. Initial requirements specified in hotel franchise agreementssize and quality-tier of hoteloffer a unique empirical setting to test this. Using proprietary data on 5,547 new franchised hotels and their revenues, we find that hotels far away from their franchisor's headquarters are larger, more likely to belong to a high-quality tier, and generate higher revenues ex-post. This supports the idea that the agent's ex-post rents can serve as a substitute to the principal's monitoring intensity in the mitigation of agency problems. Our findings shed light on how formal contract terms can influence informal (relational) contracts between business partners.