Business Group Effects Research Articles

Group-affiliations and corporate cash holdings: moderating role of political connectedness

PurposeThis study examines the effect of business group affiliations on corporate cash holdings and how political connectedness modifies the relationship between business group affiliations and corporate cash holdings.Design/methodology/approachThe multiple ordinary least square regression with year dummies is used to estimate the effect of business groups on cash holdings. For moderating, the multiplicative term is used. The data from 252 non-financial firms listed on Pakistan Stock Exchange were collected for the analysis from 2010 to 2018.FindingsThe findings show that business group affiliations negatively affect corporate cash holdings, and political connection positively moderates this relationship. Business group firms that are politically connected hold less cash. The firm-specific factors such as leverage, size, cash flow, and dividend dummy also significantly affect corporate cash holdings.Practical implicationsThe results imply that affiliated companies have lessened financing frictions and improved stability in their expected future cash flows. Moreover, the results indicate that political connection minimizes the opportunity and agency costs linked to cash holdings.Originality/valueThis study contributes to the existing literature by examining the moderating role of political affiliations on the relationship between business groups and cash holdings in the emerging market.

Business groups and corporate bond costs: Evidence from China

We examine the effect of business groups on corporate bond costs. Using a sample of corporate bonds issued by Chinese privately owned firms from 2007 to 2019, we show that business group-affiliated firms issue bonds at higher yield spreads than independent firms. The results hold after addressing the endogeneity issues of self-selection, selection bias, and financing decisions. We do not find that corporate governance plays a role in mitigating the negative impact of business groups on bond costs. Business groups negatively affect bond costs through tunneling and risk spillover channels, whereas financing advantage is not a transmission channel.

Using the SHAPLEY value approach to variance decomposition in strategy research: Diversification, internationalization, and corporate group effects on affiliate profitability

AbstractResearch SummaryVariance decomposition methods allow strategy scholars to identify key sources of heterogeneity in firm performance. However, most extant approaches produce estimates that depend on the order in which sources are considered, the ways they are nested, and which sources are treated as fixed or random effects. In this paper, we propose the use of an axiomatically justified, unique, and effective solution to this limitation: the “Shapley Value” approach. We show its effectiveness compared to extant methods using both simulated and real data, and use it to explore how the importance of business group effects varies with group diversification and internationalization in a large, representative sample of European firms. We thus demonstrate the method's superior accuracy and its usefulness in asking and answering new questions.Managerial SummaryA key contribution of strategic management research to managerial practice is identifying drivers of firm performance that operate at firm, corporation, industry, and national levels. A branch of this research measures the relative importance of factors at these different levels in producing variation in firm performance, thus helping top managers focus efforts on aspects of their businesses most likely to yield performance differences. However, estimates produced by extant methods are sensitive to method used, and to modeling choices made. This paper proposes the use of the “Shapley Value” approach, which is free from such sensitivity, shows its effectiveness compared to extant methods, and uses it to explore how the importance of factors at the level of the business group varies with group diversification and internationalization.

Institutional regimes and profitability transitions: the case of Indian manufacturing firms

PurposeLiterature, spanning industrial organization and strategic management disciplines, uses variance decomposition to understand the relative importance of firm, industry and business group effects in shaping profitability variations. Some literature analyzes firm profitability under transition to liberalization. Previous research has taken a static before-and-after view on institutional change. This paper aims to focus on the dynamic process of liberalization in India, analyzing how different institutional regime changes alter firm behavior leading to changes in profitability patterns.Design/methodology/approachBased on a panel data set of several thousand Indian firms, spanning the 26-year period between 1980-1981 and 2005-2006, the authors determine the relative importance of firm, industry and business group effects in explaining manufacturing firms’ profitability variances across different institutional phases. The authors evaluate three propositions that help assess transition dynamics between phases. They determine the quantum of catch-up or falling behind by firms.FindingsDifferent industries emerge as profitability leaders, as the economy progresses through different liberalization phases. Business groups that have been more effective in resource appropriation, rent-seeking, politician management and non-market activities in a controlled regime are replaced as profit leaders by those that, in a free-market economy, can be capable of intra-business resource allocation tasks and leveraging corporate capabilities.Originality/valueThe approach demonstrates how to analyze the underlying detailed structure of firm-level data, and performance outcomes, to derive nuanced interpretation of factors giving rise to the effects that explain profitability variances, and how to assess the way these effects behave over time. The dynamic evidence-based approach highlights what factors matter, where, when and why, in influencing profitability variances, which are a key dimension of industrial and economic performance.

Business group effects on the R&D intensity-internationalization relationship: Empirical evidence from India

We complement the resource-based view of the firm with agency theory in order to explore the link between R&D intensity and degree of internationalization of firms affiliated to Indian business groups. Results from the two-stage least squares panel regression estimation indicate research intensity is positively associated with the firm’s degree of internationalization. The relationship is strengthened by the concentration of ownership by family and affiliated business group firms, the board of directors’ professionalization, the wedge between voting and cash-flow rights, and the board interlocks of professional directors; but weakened by the board interlocks of family directors. Implications are discussed.

Filling institutional voids in emerging economies: The impact of capital market development and business groups on M&A deal abandonment

Business groups may fill institutional voids in emerging economies, but empirical research is lacking as to when and how institutional voids affect economic behavior of individual firms. We examine the effect of institutional voids in capital markets on individual transactions in emerging economies, focusing on M&A deals that were abandoned after being publicly announced. M&A deals may fall through when unexpected information is brought to light or financing difficulties arise. At the country level, capital market development can lower the probability of M&A deal abandonment by facilitating the flow of information and capital. At the firm level, when acquirers are affiliated with business groups, development of internal capital markets can also lower this probability, facilitating completion of the transaction and the flow of information. This effect of business groups, however, decreases as the external capital market, the institution replaced by their internal markets, develops and its benefits become widely available to non-business groups. The results of our empirical analyses on M&A transactions in nine emerging economies over 21 years support our arguments.

The intra business group effects of alliance network extensions

Purpose– The purpose of this paper is to better understand the influence of business group membership by exploring how actions by a member firm influence other firms in the business group. Specifically, the authors ask two questions in this study: when a member firm forms strategic alliances with partners outside of the business group, how does the alliance influence other members in the business group? Moreover, which types of member firms are more affected than others?Design/methodology/approach– The authors employ standard event-study methodology to examine the stock price responses for the focal and member firms on the announcement of an alliance. Moreover, the authors employ the cross-sectional regression analyses to test hypotheses concerning the impact of alliance, group, and firm characteristics on the cumulative abnormal returns of non-announcing members. All regressions are estimated using ordinary least squares.Findings– The results show that, on average, alliance-announcing member firms experience significantly positive share price responses to announcements of strategic alliances. Moreover, the impact of alliance formation spillover to other non-announcing members in the business group. The authors also find that the influences on the non-announcing members are dissimilar. The non-announcing members are more strongly affected when they are in different industries from the non-member partner, and when the ownership of the business group is more concentrated.Originality/value– This study is to extend the resource complementarities perspective, which may help firms to more effectively configure their network portfolios in order to develop synergies among related network resources. The study thus extends the alliance portfolio literature to the literature on business groups. Since the inter-firm networks within business groups are more complex than those in alliance portfolios, the authors are able to study how the structure of a business, such as ownership concentration, can influence the intra-network effect.

Do Diversified Business Groups Help Organizational Performance?

:The superior performance of firms affiliated with business groups as compared to unaffiliated firms has not been clearly established in the literature. Previous studies examining the effect of business groups on firm performance have found varying results (Khanna and Palepu 2000a, 2000b; Chang and Hong 2002; Chu 2004). These findings are the results of analysis conducted at the aggregate level across all industries. This study examines performance of affiliated and unaffiliated firms separately across three industries in India. The results indicate that the impact of group affiliation is not uniform across industries. Further, the study examines the relationship between business group diversification and firm performance across industries after controlling for certain variables that impact performance. Findings indicate that the relationship is not unique across various industries.

Firms, Markets, and the State: Institutional Change and Manufacturing Sector Profitability Variances in India

We assess absolute magnitudes, relative importance, and intertemporal differences in firm, industry, and business group effects in explaining the variance of Indian manufacturing firms’ profitability over the 26-year period between 1980–1981 and 2005–2006. We stratify the data by institutional phases to place emphasis on the role of changing institutional factors in an emerging economy: first as a regime of command and control transits to partial liberalization (between 1985 and 1991) and then to an open competitive market economy (after 1991); thereafter, financial reforms occur, followed by legal reforms. We find that liberalization significantly affects and alters the relative importance of firm, industry, and group effects. Firm effects are always important, whether in a command and control regime, with benefits accruing from protectionism and political rent seeking, or in liberalized periods where firm-specific capabilities and dynamic efficiencies are valued. Industry effects are significant in the command and control regime, when mandatory sector placement benefits firms in industries with superior profits, and in the liberalized period, when the choice of the industry segment in which to operate is open to firms. Thereafter, industry effects dissipate. Business group effects matter in explaining profitability variances. Group effects’ magnitudes, however, do not change significantly over time.

Ownership, resources, and business-group effects on affiliate performance: Evidence from Taiwan

AbstractBusiness groups not only help affiliates circumvent market imperfections, but they also have great influence on the economic development of emerging markets. This study applies three ways to clarify the influence of business-group effects on affiliate performance. First, this study finds that the business group can explain a respectable portion of the variations in affiliate performance. Second, this study examines the impact of family ownership, resource abundance, and resource dispersion on affiliate performance and finds that group size and financial resources positively affect affiliate performance, while family ownership and group diversification do not have a significant effect on affiliate performance. Finally, the magnitude of business-group effects is subject to the ownership and resources of each business group. Family groups, large groups, and highly diversified groups have smaller business-group effects, while groups with high financial resources have greater business-group effects, indicating that business-group effects are heterogeneous and dependent on different group features. This study provides support to the resource-based and the institution-based views of business groups.

Unequal Business-group Effects: Power and Status of Different Affiliated Companies

This study examines the influence of business-group effects on the performance of group affiliates in emerging markets. Prior studies assume that a business group uniformly contributes to the perfo...

Coinsurance within Business Groups: Evidence from Related Party Transactions in an Emerging Market

Using novel transaction-level data on Chinese business groups, this study investigates the coinsurance effect of business groups. A business group member will receive support from its parent firm i...

Creating relational rents: The effect of business groups on affiliated firms’ performance in Indonesia

This research attempts to extend the discussion of business groups in emerging economies by treating business groups as a form of interorganizational network that generates relational rents among affiliated firms by creating technological and managerial capabilities. Based on the relational view, this research investigates whether value created by business groups depends upon sharing, combining, and exchanging unique and specific resources or assets among affiliated firms. Results show that technological capabilities contribute to create relational rents in terms of affiliated firms’ investment in R&D and human capital. Managerial capabilities also contributed to generating relational rents through investment in managerial knowledge acquisition for affiliated firms without R&D units and in training for affiliated firms with R&D units. However, learning by exporting and learning from imported input do not yield relational rents within business groups. Overall, these findings reveal that business groups as interorganizational networks are contingent on their internal, unique, and specific capabilities, as social capital theory argues.

Family ties, interlocking directors and performance of business groups in emerging countries: The case of Chile

The effect of business groups on economic performance is controversial, both theoretically and empirically. We hypothesized that the seemingly contradictory empirical results can be explained by the differentiated governance structure of the business groups and, in particular, the role of social ties (family ties and interlocking directorates). Using a sample of Chilean firms, we analyzed the effects of social ties on the economic performance of firms affiliated to business groups. Our results support the hypothesis that the ownership-control structure (i.e., economic rights and voting rights) affects performance both directly and in interaction with social ties. Social ties improve performance when the concentration of voting rights is low, and when the voting rights of the controlling shareholders are aligned with their economic rights.

Are Group-Affiliated Firms Really More Profitable than Nonaffiliated?

The role of corporate center in influencing the economic performance of business units has been a central research topic in the industrial organization and strategic management literature. A common finding is the limited corporate and business group effects. Recently, an emerging line of studies argues that the market inefficiencies and institutional voids in emerging markets can be overcome more efficiently by large diversified business groups than by non-group small firms. Some empirical evidence also shows that non-group small firms are significantly less profitable than group-affiliated firms. This paper raises this issue by empirically investigating the influence of group affiliation on the return on assets and Tobin's q of 340 group-affiliated firms versus 423 non-group firms in Taiwan, during the period of 1997–1999. The statistical results show that group affiliation can not always create value for member firms. The size of the business group matters. When affiliated with the largest business groups, member firms indeed show improved stock market performance, but when firms are affiliated with small- and medium-sized groups, their accounting performance suffers. Findings of this paper suggest a threshold effect and a U-shape relationship between group affiliation and profitability in emerging economies.

How much does the business group matter in Korea?

AbstractWe partition the variances of profits of the companies associated with Korean business groups into business group‐specific effects, industry effects, and affiliate company‐specific effects, which roughly match corporate‐parent effects, industry effects and business unit effects, respectively, in the extant literature. We find substantial corporate‐parent effects (here, business group effects) along with industry effects and business unit effects (here, affiliate company‐specific effects). This finding may indicate that business groups play an important role in developing countries by circumventing market inefficiencies. Our results also suggest that these effects tend to be smaller in large business groups and to decrease over time. Copyright © 2002 John Wiley & Sons, Ltd.