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Business Groups in Emerging Markets-Financial Control & Sequential Investment

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Author Info
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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File URL: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp830.pdf
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Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number wp830.

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

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

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Find related papers by JEL classification:
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
K49 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Other
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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