Is Group Affiliation Profitable in Developed Countries? Not in Belgium

Abstract

Several studies find that business groups create value for affiliated companies in developing countries, which are characterized by weak institutions and poorly functioning markets. In these countries, business groups can act as an intermediary between imperfect markets and individual entrepreneurs. This raises the question whether business groups also create value in countries with strong institutions and well-functioning markets, as there are also substantial costs associated with business groups. We investigate the performance of group-affiliated companies in Belgium, and find that these companies significantly underperform compared to stand-alone companies. Moreover, our results suggest that internal capital markets in Belgian business groups result in misallocation of capital.

Corporate Finance in Europe: A Survey

“…The last aspect puts these forms of ownership into the same context as dual class shares. Buysschaert, Deloof, and Jegers (2005) show that accounting performance in Belgian business groups is significantly lower than that of similar stand-alone firms and attribute this fact to inefficient allocation of capital within groups. However, the same authors (Buysschaert, Deloof, and Jegers, 2004) also provide evidence based on equity sales that Belgian business groups do not expropriate minority shareholders.…”