Is Group Affiliation Profitable in Developed Countries? Not in Belgium

Abstract:     
Business groups have the potential both to offer benefits to member companies, and to destroy value. A number of studies find that group affiliation creates value for companies in emerging markets like Chile, India, Korea and Turkey. This raises the question whether business groups can also create value for companies in developed countries with strong institutions and well-functioning capital, labor and product markets. In these countries, the potential benefits of business groups are likely to be significantly lower than in emerging markets. We investigate the performance of group-affiliated companies in Belgium, and find that these companies significantly underperform compared to independent Belgian companies. Moreover, we find a negative relationship between net intragroup financing and the performance of affiliated companies, which suggests that internal capital markets in Belgian business groups result in misallocation of capital, by transferring funds from good performers to poorly performing group companies.

Number of Pages in PDF File: 32

Keywords: business groups, internal capital markets, company performance

JEL Classification: G3

working papers series