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Business Groups in Emerging Markets: Financial Control and Sequential Investments

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  • Christa Hainz

Abstract

Business groups in emerging markets perform better than unaffiliated firms. One explanation is that business groups perform some functions of missing institutions, for example, enforcing contracts. We investigate this by setting up a model where firms within the business group are connected to each other by a vertical production structure and an internal capital market. Thus, the business group's organizational mode and financial structure allow a self-enforcing contract to be designed. Our model of a business group shows that only sequential investments can solve the ex post moral-hazard problem. We also find that firms may prefer not to integrate.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 163 (2007)
Issue (Month): 2 (June)
Pages: 336-355

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200706)163:2_336:bgiemf_2.0.tx_2-m

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  1. Khanna, Tarun & Yafeh, Yishay, 2005. "Business Groups in Emerging Markets: Paragons or Parasites?," CEPR Discussion Papers 5208, C.E.P.R. Discussion Papers.
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  3. Simon Johnson & John McMillan & Christopher Woodruff, 2001. "Courts and Relational Contracts," NBER Working Papers 8572, National Bureau of Economic Research, Inc.
  4. Raja Kali, 2002. "Contractual governance, business groups and transition," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 10(2), pages 255-272, July.
  5. Kim, Se-Jik, 2004. "Bailout and conglomeration," Journal of Financial Economics, Elsevier, vol. 71(2), pages 315-347, February.
  6. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  7. 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.
  8. Sophie Claeys, & Gleb Lanine & Koen Schoors, 2005. "Bank Supervision Russian style: Rules versus Enforcement and Tacit Objectives," William Davidson Institute Working Papers Series wp778, William Davidson Institute at the University of Michigan.
  9. Sandro Brusco & Fausto Panunzi, 2002. "Reallocation of Corporate Resources and Managerial Incentives in Internal Capital Markets," CESifo Working Paper Series 735, CESifo Group Munich.
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  17. 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.
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  20. Giacinta Cestone & Chiara Fumagalli, 2005. "The Strategic Impact of Resource Flexibility in Business Groups," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 193-214, Winter.
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Cited by:
  1. Ben J. Heijdra & Jenny Ligthart, 2006. "Fiscal Policy, Monopolistic Competition, and Finite Lives," CESifo Working Paper Series 1661, CESifo Group Munich.
  2. Domenico Scalera & Alberto Zazzaro, 2009. "Do Inter-Firm Networks Make Access to Finance Easier? Issues and Empirical Evidence," Mo.Fi.R. Working Papers 25, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  3. William Pyle, 2005. "Collective Action and Post-Communist Enterprise: The Economic Logic of Russia’s Business Associations," William Davidson Institute Working Papers Series wp794, William Davidson Institute at the University of Michigan.
  4. Pyle, William, 2005. "Collective action and post-communist enterprise: The economic logic of Russia’s business associations," BOFIT Discussion Papers 19/2005, Bank of Finland, Institute for Economies in Transition.

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