Visibility versus Complexity in Business Groups: Evidence from Japanese Keiretsu
In this article, we examine the potential for external conflicts in large, diversified business groups. On the one hand, these highly visible groups facilitate the detection of opportunistic actions. Accordingly, reputational concerns should effectively constrain group behavior. On the other hand, these groups' complexities hinder outsiders from unveiling group strategies from among a myriad of transactions. This complexity limits the power of reputational concerns to constrain actions. Using data on initial public offer initial returns, we evaluate the trade-off between visibility and complexity. The evidence suggests that complexity dominates visibility, providing scope for opportunistic behavior against outside investors. Copyright 2001 by University of Chicago Press.