The value of group affiliation: evidence from the 2008 financial crisis

Abstract

Purpose – The purpose of this paper is to observe listed firms in China during the 2008 financial crisis and investigates how group affiliation affects firm value when the economy turns down. The paper focusses the study on answering the following questions: during the crisis, do affiliated firms have higher or lower stock returns than independent firms? Does corporate governance relate to the value of group firms? How does group affiliation influence firm value? Does performance of affiliated entrepreneurial firms differ from affiliated state-owned enterprises (SOEs)? Design/methodology/approach – The paper uses non-parametric tests and regression analysis on a sample of 1,469 Chinese listed companies to investigate the research questions. Findings – Affiliated firms have lower stock returns than independent firms by 1.91 percent during September to December of 2008. This poor performance is even worse for firms seriously shocked by the crisis. Good corporate governance can mitigate the negative effects of group affiliation on firm value. The lower valuation of affiliated firms lies in the fact that controlling shareholders undertake more related party transactions at the expense of minority shareholders. Finally, although business groups can provide internal financing for entrepreneurial firms in China, affiliated entrepreneurial firms experience a larger value decrease than affiliated SOEs due to the conflict interest between controlling and minority shareholders. Originality/value – This research provides unique evidence about the performance of group-affiliated firms during the 2008 financial crisis and documents the mechanisms through which group affiliation influences firm value.