In Business Groups We Trust

Abstract

Despite the prevalence of business groups around the world, the debate about the explanations for their existence is far from settled. We investigate the impact of trust on the prevalence of business groups. Using firm-level information on group affiliation, we perform estimations on a large sample of 258,984 companies from twenty-five European countries. We find that higher trust is associated with a lower probability to be affiliated to a business group. Our findings accord with the hypothesis that higher trust diminishes the incentives for a firm to internalize transactions through the emergence of a business group.

Keywords: Business groups, trust, organizational structure, informal institutions