When is a Nexus of Contracts More Firm-Like? Theory and Evidence from Business Groups

50 Pages Posted: 22 Oct 2009

See all articles by Sharon Belenzon

Sharon Belenzon

Duke University; NBER; Duke Innovation & Entrepreneurship Initiative

Andrea Patacconi

University of East Anglia (UEA) - Norwich Business School

Date Written: September 21, 2009

Abstract

When is a nexus of contracts more firm-like? We theoretically and empirically address this question in the context of business groups. We develop a model where assets can be diverted from one group affiliate to another and asset redeployment is more valuable when firms operate in related industries. The group ownership structure affects both the controlling shareholder's propensity to expropriate and the minority shareholders' incentives to monitor. We show that specialized groups choose more vertical structures and may well exhibit greater ownership concentration than diversified groups. We then confirm these predictions using novel and comprehensive data on business groups from 15 European countries. Interestingly, however, we also find substantial cross-country variation.

Keywords: Firm boundaries, diversification, internal structure, ownership, corporate governance, transaction cost economics, business groups

JEL Classification: D23, G32, L23

Suggested Citation

Belenzon, Sharon and Patacconi, Andrea, When is a Nexus of Contracts More Firm-Like? Theory and Evidence from Business Groups (September 21, 2009). Available at SSRN: https://ssrn.com/abstract=1476546 or http://dx.doi.org/10.2139/ssrn.1476546

Sharon Belenzon

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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(1) 617 588 1484 (Phone)

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Andrea Patacconi (Contact Author)

University of East Anglia (UEA) - Norwich Business School ( email )

Norwich
NR4 7TJ
United Kingdom

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