Business Group Heterogeneity and Firm Outcomes: Evidence from Korean Chaebols

Abstract

This study examines how business group heterogeneity affects firm outcomes using data from Korean chaebols (2007-2019). We employ a three-level empirical strategy  considering: 1) market-level average effects, 2) effects across categories of business groups, and 3) group-specific effects capturing unobservable attributes. Our analysis reveals substantial variations in affiliation effects between business groups, often diverging from average market-level effects. We find that group resources significantly impact affiliate performance - investors assign higher valuations to firms affiliated with large, financially sound, and well-performing business groups. While performance effects are primarily market-driven, we document considerable heterogeneity in financial and investment policies across groups, likely influenced by unobservable characteristics such as controlling shareholders' preferences. Our findings highlight the importance of considering business group heterogeneity when analyzing affiliate performance.

Keywords: Business groups, performance, financing policies, investment, Korea

JEL Classification: G30, G32, G35, L22