Investors’ Perception of Business Group Membership during An Economic Crisis: Evidence from the COVID-19 Pandemic

Abstract

This study exploits the economic shock triggered by the COVID-19 outbreak to examine the valuation of business group membership and internal capital markets. Based on Korean data, the empirical results reveal that value of affiliation switched from a discount to a premium as the pandemic unfolded and economic uncertainty decreased. Financial and governance risks appear as the main drivers of the discount observed during the first months of the pandemic. The analysis also shows that investors perceive group internal capital markets as a valuable source of financing in case of revenue drop.

Keywords: Business groups, financial crisis, COVID-19, internal capital market, Korea

JEL Classification: G01, G14, G38, L20