Do Business Groups Harm Capital Allocation Efficiency Outside the Business Group?

Do Business Groups Harm Capital Allocation Efficiency Outside the Business Group?

Yunxiao Liu, Woochan Kim, Taeyoon Sung

Series number :

Serial Number: 
471/2016

Date posted :

July 01 2016

Last revised :

July 10 2016
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Keywords

  • business group • 
  • Internal capital market • 
  • Capital allocation efficiency • 
  • Financial sector development • 
  • investor protection • 
  • Asian financial crisis
This study investigates whether business groups can harm the capital allocation efficiency of non-business group firms. From a sample of Korean firms (1987 to 2010), we compute an annual index of the collective strength and dominance of large business groups (LBG) per industry.
We find that this index is negatively associated with the industry-level capital allocation efficiency of non-LBG firms during a period characterized by underdeveloped financial markets and weak investor protection. The association is stronger in industries that may lack collateral or internal equity capital. Results are robust to different measures of the index and investment opportunity.

Authors

Real name: 
Yunxiao Liu
Real name: 
Taeyoon Sung