Is Group Affiliation Profitable in Developed Countries? Belgian Evidence

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: It is fairly well established that business group affiliation can compensate for relatively weak institutions in emerging markets, and in Japan. However, business groups are also common in the EU, and there have not yet been any studies of business group affiliation and firm performance in the EU. Consequently, we investigate how business group affiliation affects firm performance in Belgium. Research Findings/Insights: We find that operating profitability of group companies is significantly lower than that of stand-alone companies, while group companies have more volatile profits than stand-alone companies. Operating profitability of group companies does not depend on the extent of group diversification. Internal capital markets transfer funds from good performers to poorly performing group companies. The impact of group affiliation on profitability does not depend on group age or group ownership. Theoretical Implications: Our study is, to the best of our knowledge, the first to investigate how affiliation with a business group affects company performance in a developed country other than Japan. The results raise the question why business groups endure in so many developed countries with good investor protection and well-developed capital markets. Some explanations proposed in the literature are not confirmed. Practical Implications: Our study offers insights to policy makers and practitioners on the value and the role of business groups in developed countries. The results raise doubts about the value of these groups in such countries and suggest that policy makers may want to consider dismantling business groups in EU countries.

Are Small Business Groups an Organizational Strategy that Promotes Growth? Evidence from French SMEs

“…Results generally support the notion that BG firms have a lower volatility of profitability than independent firms, with the exception of Buysschaert et al (2008) in Belgium and Khanna and Yafeh (2005) in India. Other studies test the effect of BG affiliation on firm default risk; they observe whether BG affiliation influences firm default probability.…”

Heterogeneity in business groups and the corporate diversification–firm performance relationship

“…The control variables reflect the standard usage in the literature (e.g. Buysschaert et al, 2008;Khanna and Palepu, 2000). For instance, the size of a firm can have a positive impact on performance.…”

“…Buysschaert et al (2008) argue that the effect of business group affiliation on the profitability of member firms depends on the degree or extent of diversification of the group itself. From the resource based perspective (e.g.…”

Dividend Policies of Privately Held Companies: Stand‐Alone and Group Companies in Belgium

“…In addition to focusing on stand‐alone companies, we also consider the dividend policies of privately held companies affiliated with a business group. As in other continental European countries, family‐controlled business groups still play an important role in the accumulation and allocation of capital in the Belgian economy (see, e.g., Buysschaert et al ., 2008). We are not aware of any other studies that consider the dividend policies of privately held group companies.…”