Effect of Group Affiliation on Investments: Evidence from the Global Economic Crisis*

Abstract

This paper investigates the impact of business group structure on investment activities by group-affiliated companies. Using data on Korean business groups called chaebols we compare changes in investments across chaebol and control firms throughout the global economic crisis. To control for confounding effects, we applied an empirical strategy that identified a group of the most comparable control firms in terms of observables and eliminated the selection bias caused by unobservables. We found that during the global economic crisis, chaebol-affiliated firms increased investments, whereas control firms significantly decreased their investments. The investments of chaebol member firms were financed not through internal capital markets but through external capital markets. However, the relatively greater decreases in Tobin’s Q for chaebol firms suggest that investment efficiency of group-affiliated firms is worse than that of control firms.