Business Group Affiliation, Internal Organizational Structure, and Investment Efficiency: An International Investigation

Project: Research

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Description

The business group is a prevalent and popular organizational form in many countries outside the U.S. It comprises a set of legally independent firms that are closely linked to one another via a complex ownership structure and social interactions. Prior research on business groups has investigated both the benefits (value-adding perspective) and drawbacks (value-destroying perspective) of this form of ownership structure. The value-adding perspective typically argues that, when external markets are not well developed, the business group provides member firms with internal capital markets and financing advantages, as well as providing co-insurance in the form of bailouts (during financial crises) and risk sharing. Under this perspective, business group affiliation helps member firms to undertake profitable investment projects. In contrast, the value-destroying perspective emphasizes potential agency problems inherent in separating ownership (cash flow rights) from control (voting rights). This wedge is an important source of agency problems, especially in emerging market economies with weak legal regimes, ineffective governance mechanisms, and low-quality reporting. In this situation, the business group provides the incentives and means for the ultimate controlling owner to pursue inefficient investments for private gain. Given these two competing perspectives, the impact of business group affiliation on investment efficiency is ultimately an empirical issue. Prior studies have examined the impact of business group affiliation on earnings management or information environments, firm valuation, and corporation innovation. To my knowledge, however, the impact of business group affiliation on firm-level investment efficiency has received little attention. Consequently, little is known about: (i) whether group-affiliated firms are more efficient in their investment decisions, compared with stand-alone, independent firms; (ii) if so, whether the former is better than the latter in constraining over-investment, under-investment, or both; and (iii) the conditions under which group-affiliated firms better allocate their investment resources at firm level. I propose to investigate these important, unexplored issues using a large international sample of group-affiliated firms and comparable stand-alone, independent firms. With this sample, I will first analyze the impact of business group affiliation on firm-level investment efficiency, and then explore whether this relation is differentially affected by within-group organizational structure (pyramidal versus horizontal) and within-pyramid position (apex-layer versus bottom-layer). 

Detail(s)

Project number9042767
StatusNot started
Effective start/end date1/01/20 → …