Financial Weakness and Product Market Performance: Internal Capital Market Evidence

Abstract

Using a data set of Korean business groups in the period 1999-2006, just after the Asian Financial Crisis, this study shows how business groups' financial leverage can lead group-affiliated firms to lose market share to industry rivals. This analysis reveals that the negative effect of group leverage is greater when an affiliated firm is financially weak. Additionally, high group leverage is more detrimental to firms operating in fast-growing industries, discouraging affiliated firms from investing while encouraging their rivals. The results suggest that groups' financial positions encompass a substantial strategic dimension of group-affiliated firms.