The Effects of Losing Business Group Affiliation
Forthcoming Review Financial Studies
72 Pages Posted: 9 May 2016 Last revised: 19 Apr 2018
Date Written: May 9, 2016
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: Suggested Citation