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Review of Financial Studies Vol. 32 No. 8 2019

The Effects of Losing a Business Group Affiliation

Borja Larrain1; Giorgo Sertsios2; Francisco Urzúa I.3

1 Pontificia Universidad Católica de Chile, Escuela de Administración and FinanceUC , · 2 School of Business and Economics, Universidad de los Andes , Chile · 3 Rotterdam School of Management Erasmus University

open access

Abstract

We propose a novel identification strategy for estimating the effects of business group affiliation. We study two-firm business groups, some of which split up during the sample period, leaving some firms as stand-alone firms. We instrument for stand-alone status using shocks to the industry of the other group firm. We find that firms that become stand-alone reduce leverage and investment. Consistent with collateral cross-pledging, the effects are more pronounced when the other firm had high tangibility. Consistent with capital misallocation in groups, the reduction in leverage is stronger in firms that had low (high) profitability (leverage) relative to industry peers. Received July 3, 2017; editorial decision April 7, 2018 by Editor Wei Jiang.

DOI
10.1093/rfs/hhy120
Volume
32
Issue
8
Pages
3036-3074
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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