Do Business Groups Harm Capital Allocation Efficiency Outside the Business Group?

74 Pages Posted: 8 Jul 2016

See all articles by Yunxiao Liu

Yunxiao Liu

affiliation not provided to SSRN

Woochan Kim

Korea University Business School; European Corporate Governance Institute (ECGI); Asian Institute of Corporate Governance (AICG)

Taeyoon Sung

Yonsei University, School of Economics

Date Written: July 7, 2016

Abstract

This study investigates whether business groups can harm the capital allocation efficiency of non-business group firms. From a sample of Korean firms (1987 to 2010), we compute an annual index of the collective strength and dominance of large business groups (LBG) per industry. We find that this index is negatively associated with the industry-level capital allocation efficiency of non-LBG firms during a period characterized by underdeveloped financial markets and weak investor protection. The association is stronger in industries that may lack collateral or internal equity capital. Results are robust to different measures of the index and investment opportunity.

Keywords: Business group, Internal capital market, Capital allocation efficiency, Financial sector development, Investor protection, Asian financial crisis

JEL Classification: G3, G31, G32, G34

Suggested Citation

Liu, Yunxiao and Kim, Woochan and Sung, Taeyoon, Do Business Groups Harm Capital Allocation Efficiency Outside the Business Group? (July 7, 2016). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 471/2016. Available at SSRN: https://ssrn.com/abstract=2806024 or http://dx.doi.org/10.2139/ssrn.2806024

Yunxiao Liu

affiliation not provided to SSRN

Woochan Kim (Contact Author)

Korea University Business School ( email )

LG-POSCO Bldg #524
Anam-Dong, Seongbuk-Ku
Seoul, Seoul 136701
+822-3290-2816 (Phone)
+822-922-7220 (Fax)

HOME PAGE: http://biz.korea.ac.kr/professor/wckim

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Asian Institute of Corporate Governance (AICG) ( email )

1, 5-ga, Anam-dong
Sungbuk-gu
Seoul, 136-701
Korea, Republic of (South Korea)

Taeyoon Sung

Yonsei University, School of Economics ( email )

50 Yonsei-Ro
Seoul, 120-749
Korea, Republic of (South Korea)
+82-2-2123-5494 (Phone)

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