Do Business Groups Improve Performance of their Affiliated Firms?

We investigate whether being in a business group is actually beneficial to the affiliated firms. The existing empirical studies focus on cross-sectional regressions without consideration of the fact that affiliated firms may differ from standalone firms. Thus, estimates from the studies may be ambiguously capturing both the true effect that these studies attempt to find and the effect from the endogenous selection. This study addresses the selection problem by employing a matching estimator. Since we try to match the two groups of firms as closely as possible, and to eliminate unobservable firm-specific effects as much as possible, the only difference between the two groups is whether a firm is affiliated with a business group. Our preliminary results show that those standalone firms acquired by business groups generate greater performance improvement than other standalones that are not acquired by business groups, even after controlling for the selection into business groups. Regarding quality of matching, treated (acquired) firms are very similar to control (non-acquired matched) firms in terms of key firm characteristics measured prior to acquisition. Therefore, we may conclude that performance improvement comes only from being affiliated with a business group. We further investigate potential sources of performance improvement and try to reconcile our findings with existing arguments on the effect of business groups on affiliated firms.