Business Groups and Risk Sharing Around the World

HBS Comp. & Strategy Working Paper

62 Pages Posted: 25 Jan 2001

See all articles by Yishay Yafeh

Yishay Yafeh

Hebrew University of Jerusalem - Jerusalem School of Business Administration; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Tarun Khanna

Harvard University - Strategy Unit

Date Written: December 2000


Researchers commonly assume that business groups, a ubiquitous organizational form in emerging markets, permit affiliated firms to share risk by smoothing income flows and by reallocating money from one affiliate to another in times of distress. This view has received support in the literature on Japanese keiretsu. To examine the generality of these findings worldwide, we amass a new data set on business groups in 15 emerging markets, and couple this with historical and modern data from Japan. Our results, using multiple estimation techniques, corroborate the existing evidence on risk sharing within the Japanese keiretsu. In addition, in some emerging markets such as Brazil, Korea, Taiwan and Thailand, we find evidence suggesting that group affiliation is associated with a 20-30 percent reduction in the standard deviation of operating returns. We also find evidence of substantial "liquidity smoothing" in India, although data constraints prevent us from knowing the extent to which this phenomenon is widespread. However, risk reduction by business groups is far from a universal phenomenon - the magnitude of the effect is small in most of the other countries in our sample, even though it is sometimes statistically significant. Tests of two-dimensional first-order-stochastic-dominance suggest that the Japan result ? that group affiliated firms have both lower levels of operating profitability and lower standard deviations of operating profitability ? does not generalize to most emerging markets. Finally, we find no correlation between the extent of income smoothing provided by groups and measures of capital market development. We conclude that the provision of risk sharing, to compensate for under-developed capital markets, is probably not the most important reason for the ubiquity of business groups around the world.

Suggested Citation

Yafeh, Yishay and Khanna, Tarun, Business Groups and Risk Sharing Around the World (December 2000). HBS Comp. & Strategy Working Paper, Available at SSRN: or

Yishay Yafeh (Contact Author)

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem 91905
+972 2 588 3081 (Phone)
+972 2 588 1341 (Fax)


European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels


Centre for Economic Policy Research (CEPR)

United Kingdom

Tarun Khanna

Harvard University - Strategy Unit ( email )

Harvard Business School
Boston, MA 02163
United States
617-495-6038 (Phone)
617-495-0355 (Fax)

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