Do Business Groups Help Their Affiliated Firms in Their Performance?: Evidence from the Time of High External Capital Market Frictions

Abstract

This paper studies the benefit of business group affiliation using the unique dataset of firms that are acquired by Korean chaebols in the aftermath of the 1997 Asian financial crisis. To establish the causality that group affiliation causes changes in performance of affiliated firms, the study employs firms that were once nonchaebol, but later acquired by chaebols and became newly affiliated to chaebols. The analyses focuses on the Asian financial crisis that represents high external capital market frictions to bolster the argument for the group affiliation benefit. Panel regressions show that the acquired firms improve performance after acquisitions. Moreover, to address a potential concern that firm-specific characteristics may explain post-acquisition performance of the acquired firms, I match the acquired firms with nonchaebol firms with respect to pre-acquisition characteristics. The matching estimator shows that the new chaebol firms outperform the control firms after chaebol acquisitions. Cross-sectional tests reveal that the affiliation benefit is more pronounced within larger firms and firms with higher ultimate ownership of the controlling families. Finally, the new firms expand market shares and gain stronger pricing power after being group-affiliated, which sheds light on the bright side of group affiliation such as sharing group reputation and internal capital markets.