Business Groups In China Research Articles

Business Group Analysts

We exploit the rich data of business groups in China and identify sell-side analysts following multiple listed firms within a business group (BG analysts). For a group firm, we find that BG analysts issue more accurate forecasts than non-BG analysts. Such an effect is more pronounced when the focal firm shares stronger economic links with, and when its covering analysts have greater information demand for, its group peers. Further analyses suggest evidence of intragroup information flows. Around group peers’ annual earnings announcements, BG analysts are more likely than non-BG analysts to revise their forecasts for the focal firm along the same direction as group peers’ earnings surprises. Confined to analysts’ coverage initiations for a group firm, those who have covered the focal firm’s group peers prior to the coverage initiation show superior forecasting performance during the initiation year. By adopting the unique perspective of business groups, i.e., a prevalent organizational structure, our study shows that information commonalities within a business group shape analyst behaviour.

The bright side of the internal labor market: Evidence from the labor cost stickiness of firms affiliated with privately owned business groups in China

We examine whether having an internal labor market can help a firm affiliated with a privately owned business group (POBG) reduce labor cost stickiness. Our findings suggest that, when a POBG-affiliated firm experiences a decrease in sales, it has lower labor cost stickiness than an otherwise equivalent firm that is not affiliated with a POBG. Specifically, we find that, on average, a POBG-affiliated firm entirely mitigates labor cost stickiness when it has a decrease in sales. In addition, we document that, to adjust its labor cost downward, a POBG-affiliated firm hires fewer employees, rather than paying lower wages. We show that the lower labor cost stickiness is due to movement of employees from the focal firm to other firms within the same POBG. When sales fall, the POBG reallocates excess employees at the focal firm to other firms within the business group via an internal labor market, and the focal firm thereby increases its per capita profit. Moreover, we find that agency cost mediates the impact of a POBG on labor cost stickiness. When the external market is less effective or the POBG headquarters have strong incentives, the effect of POBG affiliation on the reduction in an affiliated firm's labor cost stickiness is more salient.

The effect of the industrial networks within business groups on the quality of accounting information: evidence from China

ABSTRACT We construct the parent-subsidiary industrial network within listed business groups in China. The results show that the higher the density of parent-subsidiary industrial network, the lower the quality of accounting information of listed companies. The more the parent company is in the centre of the industrial network, the higher the quality of accounting information of the listed company is. Geographical diversification of subsidiaries will intensify the adverse impact of industrial network density on the accounting information quality, and will restrain the parent-subsidiary industrial network governance effect in terms of the centrality of the listed parent company’s industrial network. Based on agency theory and the empirical results of our research, it can be inferred that the parent-subsidiary relationship in the accounting information manipulation of listed business groups is more inclined to a parent company’s supervision of its subsidiaries rather than the ‘collusion’ manipulation of the parent-subsidiary companies.

Are related-party transactions beneficial or detrimental in emerging markets? New evidence of financial services agreements from China

This paper examines a new and underexplored form of related-party transactions in which Chinese listed companies sign financial services agreements with affiliated finance companies within the same business group. With FSAs, listed companies can readily finance through internal capital markets. However, some concerns controlling shareholders can use FSAs to embezzle funds of listed companies legitimately, thereby expropriating the wealth of minority shareholders. Using a staggered difference-in-differences model with fixed effects, we empirically examine the economic consequences of FSAs. We document that FSAs are detrimental to listed companies' market valuation and operating performance. This phenomenon mainly concentrates on companies without financial constraints and those with lower bankruptcy risks. Further analysis shows that sound corporate governance could inhibit the signing of FSAs ex-ante. This paper contributes to the literature on the economic consequences of related-party transactions in emerging markets. It also provides empirical support that the internal capital market of business groups in China is inefficient and offers controlling shareholders opportunities for tunneling.

Allocation of Decision Rights and CSR Disclosure: Evidence from Listed Business Groups in China

Corporate social responsibility (CSR) research has recently begun to focus on the CSR performance of business groups, with the scope shifting from group members to business groups in general. This paper focuses on whether business groups with centralized decision rights tend to disclose more CSR information and investigates the heterogeneous effect of the number of subsidiaries. Using a dataset for listed groups in China from 2010 to 2020, our empirical test discovered that centralized decision rights could promote group CSR disclosure. For groups with many subsidiaries, centralization makes a more significant contribution to promoting CSR disclosure. The mechanism test revealed that this positive relationship between centralization and disclosure relies on efficient internal capital market allocation, a reduction in rent-seeking behavior of subsidiaries, and reputational concerns. Furthermore, we observed that the centralized decision rights influence on disclosure varies across different aspects of CSR, with a negative impact on “Social Contribution” and a positive impact on “Shareholder Responsibility”, “Employee Responsibility”, “Supplier, Customer, and Consumer Responsibility” and “Environmental Responsibility”. Centralized decision rights promote more CSR disclosures with voluntary disclosures, while regulatory disclosures have no significant effect. We research the allocation of decision rights and group CSR disclosure.

Mandatory dividend policy and perk consumption: Evidence from state-owned business groups in China

This study examines perk consumption in a business group when unlisted parent firms experience an adverse shock in their financial conditions. We exploit a quasi-experiment in China, the mandatory dividend policy of a state-owned business group starting in 2007, to conduct difference-in-differences estimation. We find that: (1) When parent central state-owned enterprises (parent CSOEs) are required to pay dividends to the government, their group-affiliated listed central state-owned enterprises (listed CSOEs) experience a substantial decrease in perk expenditures. (2) Further analyses show that the association between the mandatory dividend policy and perks is stronger in firms with a higher level of resource dependence on the business group and firms within the business group with higher resource allocation ability. (3) Our findings are more pronounced for firms with better internal and external governance. Overall, we provide the empirical evaluation of the economic consequences of the mandatory dividend policy in terms of a firm’s perks within a state-owned business group.

Business Group-Affiliation and Corporate Social Responsibility: Evidence from Listed Companies in China

Business groups have played a vital role in the development of emerging markets. However, we share very limited understanding in the role of business group that act on affiliated firms’ CSR performance. Using manually sorted data on A-share listed companies and business groups in China from 2010–2017, we examine whether a company’s business group-affiliation affects its corporate social responsibility (CSR) performance and the mediating mechanisms of this association. Our empirical models show that group companies bear a higher level of social responsibility compared to independent companies. This positive relationship between group-affiliation and social responsibility relies on resource allocation through internal capital markets, rent-seeking initiatives, and consideration of corporate reputation. Moreover, group affiliation benefits the firm’s CSR performance in employee’s responsibilities, consumers’ responsibilities and environmental responsibilities, while significantly lower the shareholders’ responsibilities. Our empirical valuation of group companies’ CSR levels can serve as a benchmark for emerging market companies implementing social responsibility policies.

Research on the Development of China's Diversified Business Groups: Paragons or Parasites?

Diversified business groups are a relatively common form of modern economy, which plays a key role in China's economic development and market process. Under the new economic situation, diversified business groups conform to the trend of economic development and play important roles in optimizing capital allocation, promoting labour employment, and enhancing brand strength. However, the development of diversified business groups is a "double-edged sword", and the positive and negative effects it brings must be fully considered. This paper discusses the formation reasons and advantages of diversified business groups in China, and also objectively analyses the tunneling behaviour, diversified discounts and rent-seeking problems that occurred during the development process.

Location still matters! How does geographic configuration influence the performance-enhancing advantages of FDI spillovers?

Abstract Although many studies on FDI spillovers either implicitly or explicitly consider the firm as a single-location entity, most countries are dominated by multi-location business groups that consist of several affiliates. Business groups and their affiliates operate in different subnational regions and vary in their responsibilities (i.e., research and development, manufacturing, and marketing & sales) as well as in their ability to coordinate internally and minimize spatial transaction costs. We argue that such variations in turn affect the ability of business groups to benefit from intra- and inter-regional FDI spillovers. We advance prior research by examining how the effects of FDI spillovers on the performance of indigenous business groups in China are influenced by 1) the location and the geographic dispersion of their portfolios of affiliates and 2) the responsibility of each affiliate. Our analysis shows that the geographic dispersion of business groups has a profound effect on how much they benefit from FDI spillovers. It also shows that business groups are particularly effective in exploiting FDI spillovers through affiliates with marketing & sales responsibilities, while affiliates with other responsibilities are not effective in doing so.

How do board ties affect the adoption of new practices? The effects of managerial interest and hierarchical power

AbstractResearch Question/IssuesMost extant literature implicitly equates obtaining information through board interlocks to acting on the information. We investigate triggers that help to translate the information into action. In addition to exposure to the information by board interlocks, we suggest that the self‐interest of the individuals who create these ties and hierarchical power of interlinked firms determines the likelihood of taking actions of adopting new practices.Research Findings/InsightsUsing the action of adopting two distinctive governance practices, stock option pays or board reform, we find that sent ties and received ties affect the adoption decisions differently. Whereas sent ties reflect managerial interests, received ties derive power from a hierarchical relationship between the focal firm and the interlinked firm. Such differential nature of sent and received ties drives a differential result in terms of adopting two distinctive governance practices. We also find support for different moderating effects of firm performance on the impact of sent and received ties.Theoretical/Academic ImplicationsIn this study, we incorporated the self‐interest of executives with sent ties to prior adopters and the power of directors who establish ties with prior adopters that are hierarchically positioned. By doing so, this study paints a more fine‐grained picture regarding underlying mechanisms by which information gained through ties is translated into action. This provides important insights for both agency theory and resource‐dependency theory.Practitioner/Policy ImplicationsHierarchical board ties are not a unique phenomenon in Japan. We often find such ties in business groups in China, India, Korea, and some European countries. Establishing board interlocks among subsidiaries in a business group is an important governance resolution for controlling the whole business group. Hence, our findings that the ties carry not only information but also agent's interest and hierarchical power should be taken into account when a business group designs board interlocks.

Do large shareholders separate the roles of CEO and board chairman for expropriations? Evidence from pyramidal business groups in China

ABSTRACT This paper proposes that the separation of the roles of CEO and board chairman is a result of, rather than a solution to large shareholder agency problem. We support this view by examining the probabilities of CEO duality in pyramidal groups. We find that the probability of CEO duality is negatively associated with the number of pyramid layers and large shareholder expropriation, the number of pyramid layers and the level of large shareholder expropriation are positively related. Further analysis reveals that CEO duality improves (dampens) firm performance in cases of more (fewer) pyramid layers.

Proximity, information, and loan pricing in internal capital markets: Evidence from China

We examine the effect of geographic proximity on loan pricing in internal capital markets by focusing on the role of information. Using a hand-collected dataset on entrusted loans within business groups in China, we find that loan prices are positively associated with the distance between borrowers and lenders, which suggests that a reduction in distance facilitates the monitoring of borrowers and gathering of soft information by lenders. Results remain unchanged after controlling for potential endogeneity. Our findings are further pronounced (1) for lenders with headquarters that are time constrained; (2) during the early years of our sample period, when the Internet and transportation infrastructure were less developed; and (3) for borrowers for whom information uncertainty is likely to be substantial and soft information is likely to be valuable, such as young borrowers and borrowers in different industries to lenders. This paper sheds new light on the role of geographic proximity in intra-group loans within business groups.

The emergence and organizational persistence of business groups in China, Japan, and Sweden

The existence of business groups has to be discussed in a systematic and comparative way. This article analyzes business groups in three countries, China, Japan, and Sweden, by providing a view as ...

AN INSTITUTIONAL-BASED VIEW OF INNOVATION — AN EXPLORATIVE COMPARISON OF BUSINESS GROUPS IN CHINA AND INDIA

The aim of this explorative study is to compare the innovation performance of business groups in China and India in order to identify their distinctive local innovation dynamics. Data collection mainly relied on two sources: The world's 142 countries ranked by the Global Innovation Index Report (2013) which provides information about the countries' institutional settings and the Joint Research Centre Database listing the world's top firms ranked by their investments in Research and Development from which we gathered information about the business groups. From the findings, it emerges that not only that China overperforms India in relation to all the Innovation Indexes but that their distinctive institutional environments tend to favour very different dynamics of innovation. More precisely, while China's regulatory environment tends to support a more conservative approach of business groups towards investments in traditional sectors, India's lack of infrastructures coupled by a more efficient regulatory environment tend to support more resourceful and creative approach. These different approaches also shape the geographical distribution of business groups' innovation performance in the two countries.

Executive compensation in business groups: Evidence from China

This paper examines executive compensation in the subsidiaries of business groups in China. Analyzing a sample of China business groups (the so-called “XiZu JiTuan” in Chinese) from 2003 to 2012, we find convincing evidence of the use of Relative Performance Evaluation (RPE) in the executive compensation of the subsidiaries of business groups. Specifically, when the change in performance of one subsidiary is lower than that of the other subsidiaries, the change in its executive compensation is significantly lower. Further, when the business group is private and the level of marketization is high, the subsidiary’s executive compensation is more likely to be influenced by the performance of the other subsidiaries. This research improves our understanding of the decision mechanisms of executive compensation in business groups and enriches the literature on executive compensation and business groups.

State Capitalism vs. Private Enterprise

We study the efficiency of internal capital markets at state-controlled and privately owned business groups in China. Using highly granular data on within-group capital flows, we document stark differences: while private groups allocate more capital to units with better investment opportunities, state groups do the opposite. Minority shareholders in state owned firms suffer as a result. Product market competition and external monitoring by outside investors help discipline state groups’ tendency to ignore investment opportunities. We conjecture that capital allocations at state groups reflect the private career objectives of their chairmen. We show that promotion depends not on increasing profitability but on avoiding layoffs. Consistent with a career motive, we find that capital allocations are used to prop up large and struggling employers, but only if the chairman has a realistic chance of being promoted and if the cost of self-interested behavior is not too high.

State Capitalism vs. Private Enterprise

We study the efficiency of capital allocations at state-controlled and privately owned business groups in China. Using highly granular data on within-group capital transfers, we document stark differences: while private groups allocate more capital to units with better investment opportunities, state groups do the opposite, especially when part of the “national team.” Minority shareholders in state owned enterprises suffer as a result. External monitoring by outside investors helps discipline state groups’ tendency to ignore investment opportunities. We trace capital allocation decisions to the objectives of the Chinese Communist Party, which incentivizes managers to maintain social stability. Consistent with the party’s policy preferences, capital allocations are used to prop up struggling employers in high-unemployment areas and when many young men enter the local labor market, but the interests of the party and of managers may be misaligned.

Business groups in China

We investigate whether business groups in China act as internal capital markets, in an environment that is characterized by a high level of government intervention, a weak legal system, and an underdeveloped financial market. We study how institutional factors, such as the ultimate owner and level of market development, shape the role of these business groups. We find that business groups help member firms overcome constraints in raising external capital, and that the internal capital market within a business group is more likely to be an alternative financing channel among state-owned firms than among private firms. We also find that the internal capital market is more likely to help those affiliated firms which are private, local government owned relative to those owned by central government, or located in regions with a well-developed institutional environment. We present evidence of the role of business groups in risk sharing among affiliated firms, but find that business group affiliation has no impact on firm accounting performance. This study sheds new light on the theory of the firm and its boundaries, and provides a better understanding of China's rapidly growing economy.

Performance efficiency of offshore business groups in China - How Taiwanese firms perform

China's strong economy and its growing market demand have attracted the investments of numerous offshore entrepreneurs. This paper describes diverse efficiency measures to characterize the productivity efficiency of offshore entrepreneurs in China. Productivity efficiency ratings should be considered as a key element for achieving greater business performance and a better market position. This study applies the Data Envelopment Analysis (DEA) approach combining ”operating flexibility” to measure the magnitude of performance differences between the entrepreneurs. Thirty-four leading firms of Taiwan in China were used as samples for analysis. The empirical result reveals that the overall technical inefficiencies of the firms are primarily due to pure technical inefficiencies rather than scale inefficiencies. A scale problem really does exist in these Taiwanese firms in China, which can be treated as support for future mergers and acquisitions between the firms as well as for public policy making for offshore investments. A benchmark-learning roadmap is constructed for those inefficient groups in order to improve their efficiency progressively. In addition, the analysis of the operating performance by DEA can provide the offshore entrepreneurs' operations with insights into resource allocation and competitive advantage as well as help with strategic decision-making, especially regarding operational styles under an intense competitive environment.

Does Group Affiliation Improve Firm Performance? The Case of Chinese State-Owned Firms

This paper analyses the performance of state-owned business groups in China. Group affiliation can be important for economic policy evaluation since the Chinese government promotes the formation of business groups as a first step in the process of reforming state enterprises into modern corporations. The analysis applies a range of econometric techniques to a sample of 657 Chinese state-owned firms in 2005 and shows that group affiliation has a robust positive effect on performance. Group affiliation may in this respect provide a successful alternative to large-scale privatisation.