The Effects of Losing a Business Group Affiliation

Abstract

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 great pyramids of America: A revised history of U.S. business groups, corporate ownership, and regulation, 1926–1950

“…Belenzon, Berkovitz, and Rios () and Larrain, Sertsios, and Urzúa () describe small European business groups with fully‐owned subsidiaries making use of an internal capital market.…”

Business groups and the study of international business: A Coasean synthesis and extension

“…Indian BG firms do more R&D than stand-alone firms (Ashwin, Krishnan, & George, 2015;Chen, Chittoor, & Vissa, 2015;Komera, Jijo Lukose, & Sasidharan, 2018;Purkayastha, Manolova, & Edelman, 2018), although not in manufacturing (Sasidharan, Lukose, & Komera, 2015), and so do BG firms in Latin America (Castellacci, 2015), South Korea (Mahmood & Lee, 2004;Mahmood & Mitchell, 2004;Kim & Lui, 2015;Lee, Lee, & Gaur, 2017), Taiwan (Hsieh, Yeh, & Chen, 2010), and elsewhere (Crespi et al, 2008). IPOs in the US are often hightech startups, and most IPOs in most countries may be new BG affiliate listings (Larrain, Sertsios, & Urzú a, 2019). However, mesoeconomically efficient resource allocation (firms in every BG acting in the interests of their group as a whole) need not lead to economy-level allocative efficiency.…”

“…The study of how BGs co-evolve with markets across the globe with divergent and changing institutions, and how they vary across markets, is of particular interest to international business (IB) scholars. Indeed, the academic literature on this topic has grown considerably over the last few decades in IB (e.g., Aggarwal, Jindal, & Seth, 2019;Elia, Munjal, & Scalera, 2020;Hernández-Trasobares & Galve-Gó rriz, 2020;Lahiri & Dhandapani, 2019;Li & Yayavaram, 2019;Piana, Vecchi, & Jimenez, 2018;Tan & Meyer, 2019) and related fields (e.g., Almeida & Wolfenzon, D. 2006a, b;Buchuk, Larrain, Muñoz, & Urzú a, 2014;Dan & Hui, 2019;Larrain & Urzú a, 2016;Larrain, Sertsios, & Urzú a, 2019) to become more commensurate with the economic importance of BGs.…”

The Evolution of Ownership Structures: Privatization, Business Groups, and Pyramids

“…Pyramids have been argued to represent a solution for firms to ease financial constraints (Khanna and Palepu, 2000). However, pyramids can also be related to agency conflicts, tunneling, and inefficiencies (Johnson et al, 2000;Bertrand et al, 2002;Larrain et al, 2018). An analysis of wedges and capital markets within groups has the potential to help us to understand the relative importance of these opposing hypotheses.…”

“…In 1990, 1 A business group is defined as a set of firms with a common controlling shareholder. Examples of papers studying the effects of business groups include Khanna and Palepu (2000); Johnson et al (2000); Bertrand et al (2002); Bae et al (2002); Morck et al (2005); Baek et al (2006); Cheung et al (2006); Gopalan et al (2007); Larrain et al (2018); Almeida et al (2011); Masulis et al (2011); Belenzon et al (2013); Lins et al (2013); Almeida et al (2015); Huneeus et al (2018); Cestone et al (2018) among others.…”