The Effects of Losing Business Group Affiliation

Forthcoming Review Financial Studies

72 Pages Posted: 9 May 2016 Last revised: 19 Apr 2018

See all articles by Borja Larrain

Borja Larrain

Pontificia Universidad Catolica de Chile

Giorgo Sertsios

Universidad de los Andes, Chile

Francisco Urzúa I.

Erasmus University

Date Written: May 9, 2016

Abstract

We propose a novel identification strategy for estimating the effects of business group affiliation. We study two-firm business groups, some of which split up during the sample period, leaving some firms as stand-alones. We instrument for stand-alone status using shocks to the industry of the other group firm. We find that firms that become stand-alone reduce leverage and investment. Consistent with collateral cross-pledging, the effects are more pronounced when the other firm had high tangibility. Consistent with capital misallocation in groups, the reduction in leverage is stronger in firms that had low (high) profitability (leverage) relative to industry peers.

Keywords: Business groups; conglomerates; internal capital markets

JEL Classification: G30

Suggested Citation

Larrain, Borja and Sertsios, Giorgo and Urzua, Francisco, The Effects of Losing Business Group Affiliation (May 9, 2016). Forthcoming Review Financial Studies. Available at SSRN: https://ssrn.com/abstract=2777552 or http://dx.doi.org/10.2139/ssrn.2777552

Borja Larrain

Pontificia Universidad Catolica de Chile ( email )

Ave. Vicuna Mackenna 4860, Macul
Santiago
Chile

HOME PAGE: http://economiayadministracion.uc.cl/personal/blarrain/

Giorgo Sertsios (Contact Author)

Universidad de los Andes, Chile ( email )

Mons. Álvaro del Portillo
Las Condes
Santiago, 12.455
Chile

Francisco Urzua

Erasmus University ( email )

Burgemeester Oudlaan 50
Rotterdam, 3000DR
Netherlands

HOME PAGE: http://sites.google.com/site/furzuai/

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