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Understanding the behavior of business groups: A dynamic model and empirical analysis

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  • Cheong, Kwang Soo
  • Choo, Kineung
  • Lee, Keun
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Abstract

Business groups play significant economic roles in many countries. Motivated by the observation that the literature on business groups is ever-expanding yet providing ambiguous or conflicting results based on empirical investigations, this paper intends to first develop a theoretical model to explain behavior and performance of business groups and then conduct complementary empirical analysis. Drawing on Penrose's (1959) resource-based theory of firm growth, this paper models the firms of which some key resources are lumpy or indivisible and thus they must be purchased or installed only in certain sizes. This premise in the basic model leads to an advantage for business-group firms relative to stand-alone firms without respect to the existence of market failure. The model also predicts that business-group firms will be more profitable in terms of profit-to-sales and will have higher sales and asset, leading to faster growth, other things being equal. Implications of such advantage on firms' performance and behavior are investigated first using numerical experiments based on a dynamic optimization model and then regression analyses based on the Korean firm data. It turns out that a set of testable predictions derived from the basic theoretical model is generally consistent with the conclusions from numerical experiments and empirical tests.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 76 (2010)
Issue (Month): 2 (November)
Pages: 141-152

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Handle: RePEc:eee:jeborg:v:76:y:2010:i:2:p:141-152

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Web page: http://www.elsevier.com/locate/jebo

Related research

Keywords: Business groups Stand-alone firms Lumpy investment Chaebols Korea Resource-based theory of the firm;

References

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  1. Tarun Khanna & Krishna Palepu, 1999. "Policy Shocks, Market Intermediaries, and Corporate Strategy: The Evolution of Business Groups in Chile and India," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(2), pages 271-310, 06.
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  4. Tarun Khanna & Yishay Yafeh, 2007. "Business Groups in Emerging Markets: Paragons or Parasites?," Journal of Economic Literature, American Economic Association, vol. 45(2), pages 331-372, June.
  5. Leff, Nathaniel H, 1978. "Industrial Organization and Entrepreneurship in the Developing Countries: The Economic Groups," Economic Development and Cultural Change, University of Chicago Press, vol. 26(4), pages 661-75, July.
  6. Joh, Sung Wook, 2003. "Corporate governance and firm profitability: evidence from Korea before the economic crisis," Journal of Financial Economics, Elsevier, vol. 68(2), pages 287-322, May.
  7. Tarun Khanna & Krishna Palepu, 1999. "Emerging Market Business Groups, Foreign Investors, and Corporate Governance," NBER Working Papers 6955, National Bureau of Economic Research, Inc.
  8. Tarun Khanna & Krishna Palepu, 2000. "Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups," Journal of Finance, American Finance Association, vol. 55(2), pages 867-891, 04.
  9. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, 04.
  10. Lee, Keun & Kim, Ji Youn & Lee, Oonkyu, 2010. "Long-term evolution of the firm value and behavior of business groups: Korean chaebols between weak premium, strong discount, and strong premium," Journal of the Japanese and International Economies, Elsevier, vol. 24(3), pages 412-440, September.
  11. Heitor V. Almeida & Daniel Wolfenzon, 2006. "A Theory of Pyramidal Ownership and Family Business Groups," Journal of Finance, American Finance Association, vol. 61(6), pages 2637-2680, December.
  12. Khanna, Tarun, 2000. "Business groups and social welfare in emerging markets: Existing evidence and unanswered questions," European Economic Review, Elsevier, vol. 44(4-6), pages 748-761, May.
  13. Choi, Jeong-Pyo & Cowing, Thomas G., 1999. "Firm behavior and group affiliation: The strategic role of corporate grouping for Korean firms," Journal of Asian Economics, Elsevier, vol. 10(2), pages 195-209.
  14. Granovetter, Mark, 1995. "Coase Revisited: Business Groups in the Modern Economy," Industrial and Corporate Change, Oxford University Press, vol. 4(1), pages 93-130.
  15. Chang, Sea Jin & Choi, Unghwan, 1988. "Strategy, Structure and Performance of Korean Business Groups: A Transactions Cost Approach," Journal of Industrial Economics, Wiley Blackwell, vol. 37(2), pages 141-58, December.
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Citations

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Cited by:
  1. Anaïs HAMELIN, 2013. "Does Size Matter? Firm And Business Group Size Influence On The Benefits Of Group Affiliation," Working Papers of LaRGE Research Center 2013-10, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
  2. LEE, Keun & CHOO, Kineung & Yoon, Minho, 2013. "Comparing the Productivity Impacts of Knowledge Spillovers from Network and Arm’s Length Industries:Findings from Business Groups in Korea," IIR Working Paper 13-15, Institute of Innovation Research, Hitotsubashi University.

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