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Business Groups in Emerging Markets-Financial Control & Sequential Investment

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  • Christa Hainz

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Abstract

Business groups in emerging markets perform better than unaffiliated firms. One explanation is that business groups substitute 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 the 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

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp830.

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Length: pages
Date of creation: 01 Jun 2006
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Handle: RePEc:wdi:papers:2006-830

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Keywords: Business groups; self-enforcing contract; institutions; internal capital market;

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